Sleep Easy With HNI Corporation’s Comfortable 3.5% Yield

The results from the furniture industry have been mixed to be sure but the underlying trend is very good. Business is improving, written sales are rising, and demand is strong. Looking at the latest Home Builders Index (HBI) I’d say demand for new residential and home-office furniture is going to stay high.

If you are not aware, the October HBI rose 2 points to set the second new all-time high in two months. Within the report, the sales of new homes and the 6-month outlook for sales both rose to hit new highs while traffic held steady at an all-time high.

Unlike competitor Steelcase (NYSE:SCS), which is more suited to the industrial side of the business (think furnishing an office building or a hospital), HNI Corporation (NYSE:HNI) targets smaller, single office spaces with a focus on the home office, home hearth (fireplaces) and residential construction.

HNI Corporation reported $507.06 million in top-line revenue for the 3rd quarter. This is down nearly 19% from the prior year but shows sequential improvement and beat consensus by 200 basis points. The company’s revenue was underpinned by the Residential Building Products segment which is, unfortunately, the larger of the two operating arms of the company. Sales of Residential Building Products grew 9% from the previous year while those in the Workplace segment fell -27%.

Moving down, the company’s margins contracted slightly over the past year as rising costs related to COVID-19 were offset by reduced SG&A and CAPEX. Adjusted and GAAP earnings fell from the previous year but topped the consensus by wide margins. The adjusted $0.71 beat by a quarter and puts the company within $0.21 of the FY consensus. Even without the company’s positive outlook, the analyst’s targets are too low and beg an update of targets if not an outright upgrade of the stock.

Looking forward, the company says weakness in the Workplace segment will persist into the 4th quarter at least. Even so, the company’s sales have been picking up over the past quarter and point to sequential improvement. Residential orders are up 35% in the quarter, more than triple the realized gain, which also points to ongoing strength in the current quarter. Notably, for me anyway, the company says eCommerce is up 35% and would have been stronger if not for supply constraints.

HNI Corporation pays a noticeably high 3.4% yield but one that should be safe for the duration. The company is paying out about 82% of its current-year earnings consensus but there are many mitigating factors to consider. The first is that 3rd quarter earnings were well above consensus which puts the payout ratio much lower than the 82% listed prior to the release. The second is that business results are expected to improve over the next year bringing the ratio down into the low 60% range. The third is the balance sheet. The company carries very little debt, what debt there is was reduced by roughly 25% over the past quarter, the company’s cash position and cash-flow are improving, and there is ample free-cash-flow.

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Now, the company has a ten-year history of increases so there is more reason than my speculation to believe in a future increase. The catch is that the 5-year CAGR is in the low single digits and the company has, so far, declined to increase the payout this year. The upshot is that a dividend increase will probably come in calendar 2021 if not sooner.

Shares of HNI Corporation are moving up following the 3Q news and setting a new high. The stock is confirming a continuation of its rebound-uptrend that is in turn confirmed by the indicators. Both MACD and stochastic are consistent with a rising market with one catch. Stochastic is high in its range and could be considered Overbought with resistance not too far overhead. The next resistance point is near $38 and then $40. If price action can move above $40 larger gains are in store.