The Energizer Bunny is continuing to beat. In today’s dividend stock analysis, we will review a company that has a lot of moving parts: Energizer Holdings, Inc. (NYSE:ENR). The company continues to grow through acquisition. We will review the company’s recent acquisitions, debt levels, and run the company through our stock screener to determine if the company meets our investment criteria. However, based on the results of the analysis, we will not be initiating a position today. But as always, let’s review the details to learn why.
Brands and Spectrum Acquisition
When I think of Energizer, I think of the company’s iconic bunny rolling across the screen beating the drum. Who doesn’t remember those commercials? Looking through the company’s website, the company is much more than that bunny. After the close of recent acquisitions, the company now possesses some of the following leading names in the battery, auto, and automotive fragrance/apparel: Energizer, EVEREADY, Rayovac, VARTA, A/C Pro, Armor All, California Scents, and Nu Finish.
These brands were not all organically developed. In fact, acquisitions have expanded their brand portfolio significantly over the last year. Nu Finish was acquired in 2018 and the company closed the acquisition of Spectrum Brands’ Battery and Portable Light and Auto businesses in January 2019. This was not a cheap acquisition, but with it, the company significantly expanded their auto footprint by acquiring an industry leader. The Spectrum business added the following names to their portfolio: Rayovac, Varta, Armor All, A/C Pro, and others. This is a major leap by the company into the auto business and Energizer is hoping to merge their market and technological expertise with Spectrum’s auto expertise.
Updated Guidance in Earnings Release
Typically, I will review the company’s performance in their last earnings release. However, since this was the first quarter earnings release and the company closed a major acquisition, I will pass on reviewing the results. Rather, I’ll focus on another aspect of the earnings release that is important to customers.
In the earnings release, management also provided an update on the company’s forecasted diluted EPS. The company is forecasting diluted EPS of $3.45/share – $3.55/share for the 2019 fiscal year. What was interesting was what was not included in this figure. As we noted earlier, Energizer has been on quite the acquisition spree. The Spectrum acquisition closed in January 2019, the period dafter the reported period in the earnings release. Thus, the impact was excluded from the EPS forecast. Per the earnings release, the EPS impact will be included in the second quarter’s earnings release once the company is fully integrated.
This amount is significantly greater than the EPS figure reported in the previous year. For Fiscal Year 2018, the company reported EPS of $1.52/share. After reviewing the company’s earnings release per SEC.gov, the company highlighted that EPS was negatively impacted by the Tax Law enacted during the company’s first quarter (negative $.64/share impact) and merger/implementation costs (negative $1.00/share impact). While Tax Law was a one-time impact on earnings, the company will still be hampered by acquisition costs in 2019 as a result of the Spectrum acquisition. It was not clear if the acquisition costs were included in the forecast, but I guess we will have to wait and see for the updated amount when next quarter’s earnings are released.
Energizer’s Debt Analysis
Look at the company’s balance sheet at the end of the most recent quarter, 12/31/18, one thing jumps off the page at me. The company’s debt load increased significantly from the previous quarter end. On their balance sheet, the company displays total Long-term debt and Long-term debt held in escrow. The Long Term Debt balance remained about the same between periods (increasing by $.7m). Long-term debt in escrow is where the activity happened during the quarter. This balance increased by $1,115.5m, led by two new credit facilities during the quarter related to the acquisition of Spectrum Brands Holdings.
Why is this significant? With the increased debt balance, the company’s debt-to-equity ratio remains high. At 12/31/18, the company’s debt-to-equity ratio is 47.18X. This is an insane level compared to some of the other companies out there. After reviewing the company’s previous year’s financial statements, it appears that the company typically maintains a high debt level (90.07X at 12/31/17). I find it fascinating that the company has a high debt tolerance, especially in the current interest rate environment. Since I have been burned by dividend cuts in the past from high-debt load companies (i.e. Kraft-Heinz), this is a concerning statistic to me. Hopefully this acquisition can deliver the projected operating cash flow desired to cover the additional debt taken out to complete the acquisition.
Dividend Diplomats Stock Screener
Now, it is time to put the company through the Dividend Diplomats’ Dividend Stock Screener. This is our simple stock screener that we use to determine if the company we are analyzing currently passes our investment filters used to identify undervalued dividend growth stocks. If a company passes our screener and a few other metrics, we will consider purchasing. Our stock screener uses three simple screens to identify the stocks: P/E ratio (valuation), dividend payout ratio (ability to continue growing their dividend), and their dividend growth rate/history of increasing their dividend (as we focus on companies that have demonstrated their ability to increase their dividend over a long period of time). Let’s see the results!
|Ticker||Price – 3/18/19||Forward EPS||Annual Dividend||Yield||Payout Ratio||3-Yr DGR||P/E Ratio|
**Sources: Pricing information, forward EPS, and annual dividend were obtained from Yahoo! Finance. The remaining figures in the table above were calculated by the author. Note: The author used the $3.00/share average analyst EPS figure from Yahoo! as opposed to the estimate provided by management due to the conservative nature of the estimate.
1) Dividend Yield: Typically, I look to invest in companies with dividend yields exceeding the S&P 500 yield of just under 2%. Otherwise, I would consider investing in a nice, diversified S&P 500 mutual fund, or ETF. ENR’s dividend yield is above the markets by a decent amount, passing this metric of our stock screener.
2) Payout Ratio: We typically use a 60% threshold when reviewing a company’s payout ratio, as we believe this percentage point allows a company to continue to grow their dividend going forward without sacrificing the safety of their dividend. ENR’s payout ratio is only 40%, assuming the analyst average EPS. Well below our 60% threshold.
3) Dividend History and Dividend Growth Rate: ENR is relatively new to the dividend game. The company announced its first dividend payment in 2012. While the company has increased their dividend since, the history is muddy due to the spin-off of Edgewell Personal Care Company (NYSE:EPC) in 2015. Since then, the company has increased their dividend annually and just announced a 3.45% dividend increase in February 2019. It is too early to say the company is committed to being a dividend growth company based on that history. Further, the company’s dividend increases have been average recently. Their last increase was lower than their 3-year average of 6.3%. I would expect dividend increases to remain small over the next few years, as management is committing significant capital to acquisitions.
4) P/E Ratio: The final metric of our stock screener focuses on the current valuation of the company. I’m always looking for companies that are trading at a multiple below the broader market. Currently, the broader market has a historical P/E ratio in the mid-20x and a forward P/E ratio between 17x and 18x (per The Wall Street Journal). Right now, ENR is trading at a discount to the broader market. The discount isn’t great, but their 15.50X multiple is below the overall market.
On paper, Energizer passes a few metrics of our stock screener (valuation and payout ratio). However, the company does not have an extensive dividend increase streak (since the company has only paid a dividend since 2012). Further, I am not a fan of the increased debt loads that the company continues to pile on with their acquisitions. If I decided to purchase, ENR would easily have the highest debt-to-equity ratio in my portfolio. And it wouldn’t even be close to stock #2 in my portfolio. I am a little debt averse based on dividend cuts in the past. In particular, the company incurred a lot of debt to acquire a business that represents a new industry for management. I am not saying the acquisition will fail. However, there are a lot of question marks about the company that will only be answered over time. How will the company’s integrate? Will the acquisition be immediately accretive to earnings? Or will the merger costs far outweigh the benefits in 2019 and 2020? Due to the question marks and the high debt levels, I am going to pass on investing in Energizer Holdings at the moment.
Are you investing in Energizer Holdings at the moment? What are your thoughts about the Spectrum acquisition? Am i too concerned about the debt levels?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.