6 4 Associated CointreeAlex on 01/02/2022 - 14:07 cointree.com (142...Read More
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Today's pick has paid a higher dividend each year for the past 54 years. It has been paying and raising its dividend since LBJ was in the White House. Recessions, wars, inflation, stock market crashes - this stock just chugs along doing its thing.
This places today's pick among the elite class of stocks known as Dividend Kings, which have paid rising dividends for at least the past 50 years. There are only 38 such stocks at the moment because getting on the list is a lot harder than it may appear. As you can imagine, the number of companies on that list grows very slowly.
Just because a stock is a Dividend King doesn't mean that it will be a good investment for you. Many of them are fully valued, overvalued, have poor prospects, or are at the wrong place in the business cycle. Others may be in industries you don't like for one reason or another (for instance, Altria Group (MO)). Or, maybe you don't like a particular company, have other stocks in that sector, or had a bad experience with it. You can always come up with "reasons" not to invest in a company if you just don't want to.
Usually, though, there is a stock or two on the Dividend Kings list that I find interesting. In my view, having a King or two in your portfolio is a great way to build in a little stability as a core holding.
I have written about some other Kings recently. These include Cincinnati Financial Corporation (CINF), which I wrote up here, Johnson Johnson (JNJ) here, Abbott Laboratories (ABT) here, and Federal Realty Investment Trust (FRT) here. They are all up a bit since my articles on them due to a market swing toward value stocks, but not by tremendous amounts. As I write this, Abbott Labs is up the most, about 8%. These obviously are not meme stocks that go up or down 5% every day. But slow moves are the kind of performance I expect from the Kings and like about them. Nothing exciting but rather slow, steady, and dependable progress.
Embracing the Dividend Kings philosophy may require a different way of viewing securities than you are used to. We all know that the "goal" of investing is to buy low and sell high, right? That is fine, but the person on the other side of the transaction always thinks the security is headed in the opposite direction than you do. You are not always going to be right and them, wrong. At times, you are likely to be very wrong and destroy many profits you have built up over time.
If trading on price swings works for you, great, but there is an easier and potentially more profitable way to invest: for income. This is investing, not gambling.
The best strategy for trading Dividend Kings is to pick them up opportunistically and then squirrel them away to reap the long-term benefits. Get them as cheap as you can, but accumulate some. If you are a younger investor, I strongly encourage you to avoid the temptation to turn your account into a disguised way to gamble on price swings and become familiar with the Dividend Kings list and similar stocks. Trading on price swings may work for some, but overall for many investors, it is a dead-end strategy.
There has been a lot of trepidations among investors recently about the possibility of a recession or other calamities. It is the plain reality that companies can't last on the Dividend Kings list forever. Eventually, something happens and they have to cut or eliminate the dividend, at least for a while. That "something" is often a recession.
Literally, dozens of companies have left the Dividend Kings list since 2008, most due to the 2008-2009 financial crisis. These lapsed Kings include such household names as Bank of America (BAC), General Electric (GE), and Pfizer (PFE). Sometimes, a company just doesn't raise the dividend in a given year, bouncing it from the list. This was the case with Eli Lilly (LLY) in 2008. Oh, and Dividend Kings suddenly doing things like that can be a good warning sign for a recession.
The good news, though, is that departing from the Dividend Kings list is not a death sentence for a company's stock price. Research by Barron's showed that the stock performance of former Dividend Kings often quickly recovers. Reducing the dividend and beginning a new sequence of raises from a lower level can improve a company's long-term finances and set the foundation for above-average long-term returns.
Investors may not find that kind of reset to be an appetizing tradeoff, but companies are not as obsessed with dividend streaks as investors are. Resetting has enabled companies like Pfizer to begin new dividend increase streaks (PFE once again began raising its dividend annually in 2010, the year after it cut the dividend) that may someday put them back on the Dividend Kings list.
But this article isn't about PFE or the other former Dividend Kings. It is about a current one, Stanley Black Decker (NYSE:SWK).
Stanley Black Decker, Inc. is a well-known toolmaker. Its genesis stretches all the way back to 1843 when Frederick Stanley began his company, and 1910 when Duncan Black and Alonzo Decker began theirs. Two companies, Stanley and Black Decker, merged in 2010 to form the current entity.
If you own some tools, you probably have some of SWK's products in your garage or toolbox. SWK's brands include DeWalt, Craftsman, Irwin, Porter-Cable, Facom, Lenox, Mac Tools, Vidmar, Bostitch, Proto, Cam, Pengo, Paladin, Proto, Aeroscout, Sonitrol, and of course the Black Decker and Stanley brands. Did you know SWK was involved in healthcare? Look up Aeroscout. How about business security? Learn about Sonitrol.
But SWK is known mainly for its hardware tools, power or otherwise. People who work with their hands can get picky about their power tool brands. I've personally known workers who swore by Snap-On, Craftsman, Porter, and many other brands. Some workers tend to look down on particular brands such as Stanley and Black Decker, but that is what branding is all about. Having you favor one brand and disfavor others is the very point of branding. Brands are the cornerstones of quality stocks exactly because of brand loyalty.
Fortunately, SWK has a lot of brands. They meet a variety of different needs at different points on the quality spectrum. DeWalt tools, for instance, tend to cost a little more and come out well on quality surveys. But, if you only need a drill occasionally for household tasks or a hobby, a cheaper Black Decker drill may suffice. Your needs may not match a particular brand, and that is kind of the point of brands. Anyway, we're not talking here about fixing your car or building a shed but instead about making an investment that will reward you.
SWK also is a global business, with roughly a third of its business originating outside of North America.
SWK regional revenue breakdown. (Stanley Black Decker Q4 2021 Earnings Presentation.)
Now that we understand SWK's business, let's examine how it performs as a business.
I always like to begin my analysis by looking at a company's five-year track record. This provides a good foundation for later discussion and answers a lot of questions about growth and other issues.
SWK Total Revenues Net Income Diluted Earnings/ Share EBITDA Net Debt Shares Outstanding 2017 12,966.6 1,227.3 $8.05 2,020.6 3,229.3 149.6 2018 13,982.4 605.2 $3.99 2,198.5 3,909.7 148.9 2019 14,442.2 955.8 $6.35 2,254.9 3,400.9 148.4 2020 14,534.6 1,233.8 $7.77 2,538.4 3,491.2 154.2 TTM
TTM17,168.8 1,828.4 $11.05 3,186.4 4,638.7 158.0
Figures are complete through the end of 2021. Total Revenues, Net Income, Net Interest Income, and Net Debt in $millions. Shares Outstanding are in millions. Net Debt is as of the annual report. Source: Seeking Alpha.
As shown in the table above, Stanley Black Decker's key metrics generally show positive trends over the past five years. Total Revenues, Net Income, EBITDA, and Diluted Earnings per Share all hit new highs in 2021.
However, not shown are Operating Margins. They have been in a downtrend for several quarters. As discussed below, this appears to be due to inflationary pressures.
SWK 2021 Performance In Comparison To 2020. (Stanley Black Decker.)
SWK's net debt has been fairly stable over the past five years despite all the pressures of the pandemic. Whenever it comes to debt, I defer to the credit rating agencies who keep a close eye on that. Fitch rates SWK at A- with a stable outlook, SP Global Ratings has it at A with a stable outlook, and Moody's has it at Baa1 with a stable outlook. These are all investment-grade ratings and suggest that SWK is well able to pay its debts.
During the Q4 2021 earnings call held on 1 February 2022, SWK CEO Jim Loree summarized the company's recent performance:
To summarize our 2021 performance, our revenues were $15.6 billion, up 20%, driven by a record 17% organic growth, with all businesses contributing. Our total company operating margin rate for the year was 13.9%, down versus prior year due to the growing cost inflation and supply chain challenges that emerged as the year progressed, as we chose to take the necessary steps to deliver for our customers.
While earnings for Q4 topped estimates, revenues missed analysts' targets of $4.06 billion by $370 million. Despite the miss, SWK still traded higher for the day.
Now that we have gone over the numbers, let's turn to the pros and cons.
Stanley Black Decker's current 1.84% quarterly dividend comes along like clockwork, with raises declared every July. As discussed above, these increases have been among the most reliable you will find anywhere.
The dividends' five-year growth rate is a solid 5.69%, and the payout rate is a low 23.55%. The current dividend is $0.79, and SWK should go ex-dividend early in March 2022.
The yield has dropped over the past decade, reflecting an increasingly low-yield world. It used to sit comfortably above 2%, but in recent years has seldom broken 2% aside from the height of the pandemic sell-off.
SWK yield history over the past decade.
Currently, SWK's yield sits at the upper end of its recent range. This makes it a relatively attractive buy at current levels, though the yield could always break 2% again as it did in 2019 and early in the pandemic if the market sells off.
While Seeking Alpha gives SWK a middling C grade for valuation, at least it does not look overvalued.
SWK price-to-sales ratio over the past five years.
As the graph above shows, SWK's price to sales ratio is a reasonable 1.58. This is about the average over the past five years, excluding the period of market panic at the height of the pandemic. The price/earnings ratio is around 15, well under the SP 500 Index p/e of 26.
Stanley Black Decker is honing its focus on the core tool business. It recently completed two outdoor power tool acquisitions while planning to divest its electronic security business. Generally, I view it as a positive when a company focuses more on its main business and less on ancillary endeavors.
As CEO Jim Loree noted during the call, the company is using its capital to reward shareholders:
In addition, this month, we plan to begin the return of $4 billion of capital to our shareholders through our previously announced share repurchase program, including as much as $2 billion to $2.5 billion in the first quarter of 2022. We believe these transactions, the acquisitions, the divestiture, and our substantial repurchase will result in significant value creation for investors in the short, medium, and long-term.
Analysts are positive about SWK, rating it as a Strong Buy.
Analyst price targets for SWK.
As the graph above shows, analysts see the opportunity for good price appreciation by SWK during 2022. The median target is $220, while the upper target is $245. Even if their worst projection comes true at $170, that means little downside risk from its current price. And, of course, you get to enjoy that rising dividend while you wait.
You probably don't think much about power tools except when you are out in the garage or at the hardware store. They are just there, and you can always go down to the Home Depot or Lowe's and pick up whatever you need. Power tools are so ubiquitous that it is easy to forget this is an important industry that has demand fluctuations you can capitalize on.
As we begin 2022, the power tool industry is entering a growth phase. Power tool demand is expected to increase for the rest of the 2020s, though projections vary on how much. One study pegs the compound annual growth rate at 5.1% for the next decade. Another forecast puts the CAGR at 8.8% from 2021-2028, while yet another forecast puts the CAGR at 5.7% through 2026. These increases would both represent an increase from a 3.7% CAGR between 2016 and 2020.
It is a good thing when analysts agree that demand is increasing and only fight over exactly how much demand for your products will increase in the coming years. The main factors driving this increase in demand are the growing popularity of rechargeable power tools, household power tools, handheld power tools, and sales through online channels. There also is surging demand in emerging nations such as Brazil, India, and China.
There's an old lesson probably still being taught in grade schools that the way to becoming rich is not to mine for gold, but to sell the tools that the miners use. Commercial use of power tools is expected to be driven by increased construction activity due to rising home prices, aerospace, and a continuing recovery in automotive sales.
CEO Loree noted that the company expects a cyclical business recovery in auto and aerospace to begin soon:
And lastly, we are cautiously optimistic that the cyclical recovery in auto and aero will begin to emerge in 2022, a $300 million to $400 million multiyear revenue growth opportunity for industrial.
He also commented during the call on the positive impact on SWK of certain demographic trends:
Household formation, driven by millennial first-time home purchasers as well as the urban exodus support strong housing demand and the low levels of existing housing inventory will continue to be a catalyst for new residential construction. Home prices have appreciated, building home equity, which generally supports home reinvestment growth through repair and remodel activity.
CFO Don Allan added that SWK has added manufacturing capacity to cope with the supply chain issues and projected demand growth:
Our capacity additions are on track, and we have opened 2 new power tool plants and 1 new hand tool facility in North America, which are now ramping up. These new manufacturing plants will enable shorter lead times and be accompanied by parallel regional development of our supply chain base overtime, enhancing local sourcing and speed to market.
Generally, it is a good sign when a company sees enough demand to open new factories.
SWK is developing power tools with Li-ion batteries to capitalize on this growing demand. Such batteries, in use in many other applications, were pioneered for power tools by Bosch in 2019. It is expected that better Li-ion batteries will expand the commercial acceptance of rechargeable power tools, bringing in a new customer base.
As Loree mentioned, SWK's new batteries have received good reviews:
Our new power stack battery system launched in December is enjoying an excellent market reception and has the potential for several hundred million dollars of organic growth in 2022. Popular science called it, quote-unquote, "the best cordless power tool battery we've ever used."
The focus on improving battery equipment is important because it dovetails with broader societal trends such as sustainable energy practices:
In 2021, we continue to enjoy strong double-digit growth in e-commerce, and it now represents a $2.5 billion channel for us globally and it's approaching 20% of our tool business revenue. The increased societal focus on ESG and climate and what that means for electrification presents a very attractive multiyear opportunity for outdoor power equipment. Our existing business grew almost 40% in 2021 as we continue to drive the conversion of handheld units and push mowers to cordless electric.
The power tool industry also has shown some interesting consolidation trends lately. For instance, in November 2021, Swedish company Atlas Copco acquired the Canadian Westron Group of companies. Similarly, in February 2019, Emerson Electric Co. acquired GE's Intelligent Platform business. Persistent supply chain issues may drive further industry consolidation.
Now that we have looked at the pros for Stanley Black Decker, let's review the cons.
Inflation and supply chain issues are Stanley Black Decker's major issues. CEO Loree commented about this during the call:
Although, we were pleased with the total year revenue and EPS performance, the fourth quarter was challenging, with supply chain and inflationary impacts, which impacted working capital. We strategically prioritized building additional inventory in 2021 to capture the strong demand. And in addition, we experienced the impacts from the clogged supply chain, which intensified as the year progressed as component shortages, shipping delays and inflation drove inventory levels even higher.
There is no question that inflation is surging. Some experts are saying that supply chain issues will continue throughout 2022. SWK's performance could be negatively impacted by them for quite some time.
The inflationary pressures hurt SWK's margins in 2021. The company is optimistic about correcting this, but doing so requires some assumptions:
Our total company operating margin rate for the year was 13.9%, down versus prior year due to the growing cost inflation and supply chain challenges that emerged as the year progressed, as we chose to take the necessary steps to deliver for our customers. We see this core margin rate as a temporary trough, given that we expect our continued 2021, 2022 pricing actions will be sufficient to fully offset the $1.4 billion of cost growth associated with inflation and increased cost to serve during the same two-year time period.
SWK's prospects depend on the ability to raise prices to cover the increased cost of inputs. This will require price elasticity (consumer acceptance of higher prices), which is not necessarily a given when cheap imports are available.
SWK Price Actions To Improve Margins. (Stanley Black Decker Q4 2021 Earnings Presentation.)
In fact, a lot of SWK's revenue growth recently has been driven by price increases rather than volume growth. The company freely admits this, as shown in the graphs above. You can only raise prices so much before customers start to balk no matter how justified the price increases may be. CEO Loree acknowledged this during the question and answer portion of the call:
So we - for the year, we're probably looking at a relatively flat volume performance, with a very strong price performance of 6% to 7%, so they're probably leaning closer to 7%. The Q1 dynamic will be volume probably down 4 or 5 points in the first quarter, and then improvement of that kind of modestly as the year goes on. No real big significant volume expectation in any given quarter at this stage.
It is very positive that SWK has pricing power. However, the company would be better off were that combined with higher volume. Everyone assumes increased demand and the company has prepared for it as discussed above, but whether it actually develops - in the teeth of higher prices - remains uncertain.
While SWK historically has tended to track the SP 500 Index, it has lagged badly over the past year. It is unclear if this will be a temporary or more lasting phenomenon, and investors have been giving up some market performance in exchange for that delicious dividend. Hopefully, SWK will return to its old ways of matching the SP 500, but nothing is certain.
SWK total return vs. SP 500 over the past five years.
The company's recent underperformance likely is attributable to the growing surge of inflation that, as mentioned above, is hurting margins. Note in the chart above how SWK began underperforming the SP 500 in mid-2021, right when inflation fears began arose. The stock fell but it couldn't get up, and it still hasn't reclaimed those losses.
All of the SWK insider transactions during 2020 and 2021 were sales. Some investors look at this as an important indicator of management confidence in future performance.
While bullish on SWK overall, I do not currently own any shares because of the uncertainty and danger inflation poses. I will be watching it for dips to pick up a share or two here and there opportunistically, but the macroeconomic picture is too cloudy at the moment. SWK will be a much better buy when inflation eases and the supply chain issues clear up.
There is no question that Stanley Black Decker is not one of the more exciting plays in the market. You won't hear the CNBC anchors talking about it very often, the stock bulletin boards won't be full of chatter about it, and the company doesn't make a lot of waves in the news. However, SWK is a solid, steady performer that is taking solid steps to reward shareholders. Its business has the wind behind it due to projections of growth in global power tool sales for the rest of the decade as the world recovers from the pandemic. You may want to put Stanley Black Decker on your watchlist and perhaps pick up a share or two on dips.
This article was written by
I had my first passbook savings account in the 1960s, which taught me to invest, and lost money in the 1987 crash. Subsequently, I have run investor chat rooms and an investing blog. I have traveled across the country to lecture on investing, which is a lot of fun because it is great to meet fellow investors. I also am a published author (aside from SA) and maintain a blog covering many different topics at Filminspector.com. I bought my first property in 1993. Real estate is my passion and I enjoy writing about it. I usually invest in income stocks such as REITs, but also follow, invest in, and occasionally cover other areas in articles. I also write in various forums about World War II. Oh, and I was mentioned in "Scam Dogs And Mo-Mo Mamas: Inside the Wild and Woolly World of Internet Stock Trading" (ISBN-13: 978-0060196202) (2000), by Wall Street Journal reporter John R. Emshwiller.
Disclosure: I/we have a beneficial long position in the shares of ABT, FRT, CINF, JNJ either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
6 4 Associated CointreeAlex on 01/02/2022 - 14:07 cointree.com (142...Read More