Dividend Stock to Avoid: Energizer Holdings (ENR) and the Secular Decline of Alkaline Batteries

Energizer Holdings (ENR) is a well-known consumer brand. The company recently underwent a corporate restructuring, a spin-off. Energizer Holdings current dividend yield is 2% with a payout ratio at 50%. Finally, Energizer recently increased its quarterly dividend by 10%.

Energizer is what we classify as a new dividend payer and given its recent history, it is a company we should be interested in buying. But we’re not.

Why?

It starts with this photo.

Old Consumer Electronics in iPhone

Source unknown.

Everything in the photo above and a whole lot more resides in this device.

iPhone

Click image to enlarge.

All those old consumer electronic devices ran on alkaline batteries. And now your smartphone runs on a rechargeable lithium battery.

The old household battery drawer filled with AA, AAA, C, and D batteries has now been replaced by the drawer full of USB cables.

Alkaline Battery Secular Decline

Because of this, Alkaline batteries are in a secular decline.

Alkaline Battery Decline

Click image to enlarge. From Stephen Saroki’s 2017 Ira Sohn Presentation.

From Energizer Holding’s 2016 10-K we see total battery sales declining too.

Energizer Battery Sales

From 2016 10K.

For the foreseeable future, alkaline batteries will not completely disappear. The argument then is alkaline batteries sales will level out and/or shift into a much slower decline. Especially once the smartphone markets mature. Price increases should help offset future declines in volume.

Given the low capital needs to maintain the battery business Energizer Holdings will continue to produce strong cash flows. Much like tobacco companies and cigarette sales. And now soda companies.

The difference is tobacco companies’ customers are extremely addicted brand loyal to a specific cigarette. Soda drinkers are brand loyal too. Not to the extent of a smoker.

Both products provide a sensory experience for their customers. Batteries do not.

E-Commerce & Brand Value

Before the internet, the smartphone, and the ease to comparison shop traditional advertising made it easy for consumers to pay up for the branded product, “I know this brand. Therefore I trust this brand. I shall buy this brand.”

The ability to comparison shop on the internet and access to other customer reviews have changed this.

Amazon Basics Batteries

From Stephen Saroki’s Ira Sohn 2017 Presentation.

Which battery would you buy?

Both have the same star rating but you get double the batteries for about $2 cheaper with the Amazon Basics brand.

Before the internet and customer reviews, if you saw the same set-up in the store you might assume the Amazon Basics batteries were of lower quality. Now you don’t.

The brand of the battery is less important with consumers today.

Amazon’s Increasing Market Share

The Amazon Basics battery is the leading battery sold online.

Amazon Private Label

From Mary Meeker

Online battery sales account for 2-4% of total battery sales. E-commerce is still in its infancy and rapidly growing. Online battery sales will grow along with e-commerce further hurting the sale of premium branded batteries. Pricing and margins for premium batteries will continue to decline.

Amazon does not make its own batteries. It contracts that out to a battery manufacturer in Asia. Even if that contractor is Energizer Holdings it does not make Energizer a worthwhile investment for a dividend growth investor.

As a private label contractor Energizer is now a price taker instead of a price maker. Amazon will play the other battery manufacturers off each other to get the best deal for its customers. Energizer’s position would be tenuous at best and Energizer would have to keep sacrificing margin to keep the business.

Growth

This is all a long-winded way of saying we don’t see the long runway of growth we want in a dividend growth investment.  Energizer’s revenue is not recurring nor highly repeatable. The value of its brand is deteriorating.

Energizer may be able to keep growing its dividend for the next couple of years but we don’t see how Energizer will be able to grow its dividend at above average rates over a long period of time.