Updated on October 7th, 2022 by Nikolaos Sismanis
Companies with long track records of dividend growth are among our favorite stocks. This is because long dividend growth streaks demonstrate a company’s ability to increase its distributions through a recession.
Investors’ income needs don’t disappear during recessions, so they have to be as confident as possible that their investments will continue to pay and raise dividends.
Companies with more than 50 years of dividend growth have managed to navigate multiple recessions and still increase their payments.
Achieving at least five decades of dividend growth is no small accomplishment. Only 45 stocks in the entire market have earned the right to call themselves a Dividend King.
You can see all 45 Dividend Kings here.
You can also download an Excel spreadsheet with the full list of Dividend Kings (plus important metrics such as price-to-earnings ratios and dividend yields) by clicking on the link below:
This milestone is impressive for any company, but even more so for those that are extremely sensitive to the conditions of the economy.
One of our favorite cyclical Dividend Kings is Stanley Black & Decker (SWK).
This article will examine the company’s business, prospects for growth, and future returns in an effort to determine if now is the right time to purchase this Dividend King.
Business Overview
Stanley Black & Decker is a global leader in the area of power tools, hand tools, and related products. The company maintains the top position in tools and storage sales worldwide.
Stanley Black & Decker has the number two position in commercial electronic security and engineered fastening. The current company was created when Stanley Works and Black & Decker merged in 2010.
Stanley Black & Decker generated revenue of $15.6 billion last year. The company is composed of three segments: tools & storage, industrial, and security.
Source: Investor Presentation
Stanley Black & Decker announced second-quarter results on July 28th, 2022. Revenue grew 15.5% to $4.4 billion, even though it was $350 million less than expected. Adjusted earnings–per–share of $1.77 compared unfavorably to adjusted earnings–per–share of $3.08 in the prior year and was also $0.36 below estimates.
Organic growth declined 6% in the second quarter. Sales for tools & outdoor, the largest segment within the company, experienced an organic decline of 9% as a 7% benefit from pricing was more than offset by a decline in volume. North America and Europe declined by more than 10% while emerging markets remained flat.
Infrastructure grew 26% due to the ongoing high demand for attachment tools. Engineered fastening was up 7% as the aerospace market has returned to growth. General industrial and automotive fasteners also performed well.
Adjusted gross margin contracted 800 basis points to 27.9% as higher prices were more than offset by higher commodity inflation and lower volume. The company also announced a cost reduction program that is expected to reduce expenses by $1 billion by the end of 2023 and by $2 billion within three years.
Due to inflationary pressures and lower demand, the company now expects adjusted earnings-per-share in a range of $5.00 to $6.00, down from $9.50 to $10.50 and $12.00 to $12.50 previously.
Growth Prospects
Stanley Black & Decker has performed well over the last decade as adjusted earnings-per-share grew at an annual rate of 10.2% between 2012 and last year.
We expect the company to continue to grow earnings–per–share at a rate of 8% annually due to a humble starting base for earnings-per-share, organic revenue growth, and contributions from acquisitions.
Source: Investor Presentation
Stanley Black & Decker has become the worldwide leader in tools and related products because of its iconic brands like Stanley, DeWalt, and Black & Decker. These names are known and trusted by professional contractors as well as do-it-yourself customers.
While organic growth has been solid during the past decade, the company also benefited from strategic acquisitions. In fact, the company has allocated around $10 billion in acquisitions since 2005 to advance growth opportunities.
For example, Stanley Black & Decker added Newell Brands’ Tools business for almost $2 billion. This purchase gave the company access to the high-quality and well-known Irwin and Lenox brand tools.
Perhaps its most significant acquisition was the purchase of the Craftsman brand from Sears Holdings for $900 million in 2017.
More recently, Stanley Black & Decker acquired the remaining 80% of MTD Products that it did not already own. MTD is a privately held manufacturer of outdoor power equipment.
MTD’s product lines include Troy-Bilt, Remington, and MTD Genuine Parts. This purchase gives Stanley Black & Decker a greater position in the outdoor power equipment space.
Stanley Black & Decker estimates the outdoor power equipment industry is worth more than $25 billion. The full takeover of MTD gives Stanley a major foothold in this large and growing market.
Despite its top billing in its industry, Stanley Black & Decker continues to seek acquisitions, both large and small, to augment its core businesses
We expect the company to grow earnings-per-share by 8% per year over the next five years.
Competitive Advantages & Recession Performance
Stanley Black & Decker’s key competitive advantage remains its well-known brands and its ability to supplement this portfolio with names like Craftsman and MTD.
The company also spends heavily on research and development in order to bring new products to market.
Like most cyclical companies, Stanley Black & Decker needs a financially healthy consumer and for the economy to be on solid ground to deliver bottom-line growth.
This was not the case during the Great Recession. Listed below are the company’s adjusted earnings-per-share results before, during, and after the last recession.
- 2006 adjusted earnings-per-share: $3.47
- 2007 adjusted earnings-per-share: $4.00 (15.3% increase)
- 2008 adjusted earnings-per-share: $3.41 (14.8% decrease)
- 2009 adjusted earnings-per-share: $2.72 (20.2% decrease)
- 2010 adjusted earnings-per-share: $3.96 (45.6% increase)
- 2011 adjusted earnings-per-share: $5.24 (32.3% increase)
As you can see, Stanley Black & Decker was far from immune to the last recession. Adjusted EPS fell more than 30% from 2007 to 2009.
However, the company rode the ensuring recovery and posted a new high for adjusted EPS by 2010.
Stanley again demonstrated its resilience in the 2020 economic recession caused by the coronavirus pandemic. The company maintained its high profitability and continued to increase its dividend, keeping its more than five-decade streak alive.
Due to the current, highly inflationary environment, the company’s earnings are expected to plummet in fiscal 2022. As has been the case in the past, however, we expect the company’s margins to expand back to their normal levels once the current macro headwinds ease.
Valuation & Expected Returns
Stanley Black & Decker’s current share price is ~$82.20. Using expected EPS of $5.50 for 2022 (representing the midpoint of full-year guidance), the stock trades with a price-to-earnings ratio of 15.1.
This is just below our five-year target price-to-earnings ratio of 16.5, which is in line with the stock’s 10-year average valuation.
If the P/E expands from 15.1 to 16.5 over the next five years, shareholder returns would be boosted by 1.9% each year.
Total returns would consist of the following:
- 8% earnings growth
- 1.9% multiple expansion
- 3.9% dividend yield
In total, Stanley Black & Decker is projected to produce annual returns of 13.2% through 2027.
Final Thoughts
Stanley Black & Decker is the undisputed leader in its industry. The company continues to invest in R&D as well as pursue acquisitions that should enable the company to continue to grow.
Stanley Black & Decker also has more than five decades of dividend growth, proving itself capable of growing its dividend even under adverse economic conditions.
The stock appears to be reasonably valued, with a five-year expected return above 10% per year. As a result, we rate Stanley Black & Decker a blue-chip stock to buy for dividend growth and attractive total returns.
Further Reading: The 10 Best Industrial Stocks Now.
The following articles contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors:
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