Bridget Weishaar: We think Hanesbrands is one of the most attractive dividend stocks in the apparel retail space with just under a 3% yield and underappreciated growth opportunities. We believe the firm possesses a narrow economic moat based on a strong brand intangible asset that yields customer loyalty as well as manufacturing advantages that command a 15% to 20% cost savings. As a result, free cash flow generation over the last three years has averaged 6% of sales.
We expect the $0.15 quarterly dividend to grow 15% on average annually over the next five years. This is driven by profitability gains resulting from cost efficiencies and also the recognition of synergies on past acquisitions. Overall, we see the dividend payout ratio averaging 34% over this period, which is roughly in-line with the 33% historical three-year average.
We also view the stock as attractively priced, trading at over a 30% discount to our $34 fair value estimate. With a product that is easily translating into e-commerce sales growth and almost $200 million in profitability upside expected from efficiencies and synergies, we think there is room for both healthy dividend growth and stock appreciation.