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Hanesbrands Is an Attractive Dividend-Paying Stock

We view narrow-moat Hanesbrands as undervalued in the apparel space.

David Swartz: We think Hanesbrands, symbol HBI, is an attractive dividend-paying stock in the apparel space. Hanesbrands pays a dividend of $0.60, representing a dividend yield of about 3.8%. The firm has significant debt and is prioritizing debt reduction. However, we believe it will generate enough free cash flow to cover its annual dividends and reduce its debt. Moreover, we expect Hanesbrands to return capital to shareholders through dividends and stock buybacks after it reaches its target debt level. The firm targets a debt-to-EBITDA level of 2 to 3 times, which we forecast will be achieved by the end of 2020.

Hanesbrands declared its first dividend in 2013 and raised it annually until 2018. The firm has kept its yearly dividend at $0.60 per share since 2017 as it had invested in acquisitions, but we believe this activity has largely ended. We anticipate Hanesbrands will hold its dividend at $0.60 for the next two years and then gradually increase it to $1.18 per share by 2028. We forecast Hanesbrands will pay out approximately 33% of its earnings as dividends over the next decade. We also forecast Hanesbrands will resume stock buyback activity in 2021. We forecast it will repurchase more than $400 million in shares in every year from 2021 to 2028.

We view Hanesbrands as undervalued at present and give it 5 stars as it trades more than 40% below our fair value estimate of $28 per share. We rate Hanesbrands as having a narrow moat. The source of this moat is its brand-intangible asset as we believe its key apparel brands, including Hanes, Champion, DIM in France, and Bonds in Australia, have leading market share, allowing for premium pricing and strong retail distribution.

Hanesbrands is best known for innerwear, and it holds leading market share in multiple categories in multiple countries. In the U.S., Hanes has the highest market share in men’s and children’s underwear, socks, hosiery, and t-shirts. Although the innerwear market does not grow much faster than population, we believe Hanesbrands can grow market share and achieve premium pricing through product innovation.

Champion is key for Hanesbrands and we believe it is a beneficiary of the athleisure fashion trend. Champion is well ahead of Hanesbrands’ stated goal of $2 billion in sales in 2022, excluding the C9 contract with Target. We forecast Champion will generate about $1.9 billion in worldwide sales this year.