This Dividend Growth Stock is Potentially 25% Undervalued

Whirlpool Corporation (WHR) manufactures and markets home appliances and related products worldwide. WHR’s product mix includes washers, dryers, refrigerators, freezers, cooking appliances, dishwashers, mixers, and other small domestic appliances. Some of its better-known brands include Whirlpool, Maytag, KitchenAid, Jenn-Air, Amana, Admiral, and Hotpoint.

Whirlpool sells its products to retailers, distributors, dealers, builders, and other manufacturers. The company was founded in 1898 and is headquartered in Benton Harbor, Michigan.

Dividend Safety

Whirlpool is a Dividend Challenger with an increase streak of 7 straight years. It yields 2.6%.
Before we see how well the company is valued, let’s see whether that dividend is safe. For a more complete discussion of dividend safety and reliability, see Dividend Growth Investing Lesson 17: Dividend Safety.

I use two services to assess dividend safety. The first is Simply Safe Dividends. They use this scale to score dividend safety:

Here is how Simply Safe Dividends scores Whirlpool:

Simply Safe Dividends’ score of 73 out of a possible 100 points for dividend safety suggests that Whirlpool’s dividend is safe and unlikely to be cut. The grade falls into the 2nd-safest ranking category.

Safety Net Pro gives Whirlpool a similar grade. They use the following scale to score dividend safety:

Here is how Safety Net Pro scores Whirlpool:

Again, they place WHR in their 2nd-highest ranking category.

Now let’s see how the company’s stock stacks up in terms of fair price.

Valuation Steps

To value a stock, I employ 4 methods and then average them out. For a complete discussion of my process, please read Dividend Growth Investing Lesson 11: Valuation.

Step 1: FASTGraphs Default Valuation

In the the first step, we check the stock’s current price against FASTGraphs’ basic estimate of its fair value.

For its basic estimate, FASTGraphs compares the stock’s actual price-to-earnings (P/E) ratio to the historical average P/E ratio of the whole stock market, which is 15.

That fair-value reference is shown by the orange line on the following graph, while the black line is Whirlpool’s actual price.

By this way of reckoning valuation, Whirpool is undervalued.

To calculate the degree of undervaluation, we simply divide the stock’s actual P/E ratio of 11.9 (shown at the upper right) by the ratio of 15 that was used to draw the orange line.

We get 11.9 / 15.0 = 0.79. Translating that to 79%, this step suggests that Whirlpool is 21% undervalued.

We can use that undervaluation to calculate Whirlpool’s fair price.

We divide its current price by 0.79. That’s $172.14 / 0.79 or about $218.

(I round fair-value estimates off to the nearest dollar to avoid creating a false sense of precision.)

Step 2: FASTGraphs Normalized Valuation

In the second step, we compare the stock’s current P/E ratio to its own long-term average P/E ratio. By doing this, we judge fair value by recognizing how the market has historically valued Whirlpool itself rather than by how the market has valued all stocks over many years.

This changes the result somewhat.It turns out that WHR has historically been undervalued compared to the market. Its long-term P/E ratio is 12.7 (see the dark blue box in the right-hand panel.

Whirlpool’s current price is still under its fair value as determined by this step, but not as dramatically as in the first step. The degree of undervaluation is 11.9 / 12.7 = 0.94, or 6% undervalued.

Using the same equation as in the first step, we get a fair value price of $172.14 / 0.94 = about $183.

Step 3: Morningstar Star Rating (CFRA Substituted)

The next step is to see what Morningstar has to say.

Morningstar ignores P/E ratios. Instead, they use a discounted cash flow (DCF) model. They discount all of the stock’s projected future cash flows back to the present to arrive at a fair value estimate. (If you would like to learn more about how this works, check out this excellent explanation at moneychimp.)

Unfortunately, Morningstar does not rate Whirlpool at the present time.

For a substitute, let’s take a look at CFRA (formerly S&P Capital IQ), which is another well-known independent research firm. Their most recent report on Whirlpool indicates that they believe that the stock is very undervalued.

As you can see, they estimate that Whirlpool is 45% undervalued, and that its fair price is $245.

Step 4: Current Yield vs. Historical Yield

Finally, as a 4th valuation method, we compare the stock’s current yield to its historical yield. If a stock is yielding more than its historical average, that suggests that it is a better value than usual.

Whirlpool’s current yield is 2.6%. According to Morningstar, its 5-year average yield is 1.9%. Thus WHR’s yield is 37% higher than its 5-year average.

That big gap is the result of regular large dividend increases combined with a stagnant price. Whirlpool’s 5-year dividend growth rate has been 15% per year, while its price today is the same as it was in late 2014. That’s almost 3 years ago.

In applying this 4th method of valuation, I cut off valuation gaps at 20%, because this method, while instructive, is inherently indirect.

Doing the math using a 20% undervaluation estimate, we get a fair price estimate of about $213.

Valuation Summary

My final valuation is a simple average of the 4 approaches just described.

The average of the 4 fair-value estimates is $215 compared to Whirlpool’s actual price of about $172. That’s a 25% discount to fair value, which I call “way undervalued.” My cutoff between “undervalued” and “way undervalued” is >20%.

Disclosure and Caution

I do not own Whirlpool. The fact that the stock’s valuation is favorable does not mean that I would select it for my own portfolio. A fuller analysis would be required. I do note that the stock has a whopping beta of 1.8, meaning that its price is far more volatile than the market. This may make it unattractive to some investors.

As always, this is not a recommendation to buy WHR. Perform your own due diligence. Check out the company’s dividend record, quality, financial position, business model, and prospects for the future. Also consider whether it fits (or does not fit) your long-term investing goals.

— Dave Van Knapp

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