As artificial intelligence (AI) and mega-cap growth stocks take the spotlight, the impressive run-up in stable stocks like Walmart (NYSE: WMT). Up just 30% year to date, Walmart is the best performing part of the Dow Jones Industrial Average — faster than the profits of Amazon, Microsoft, Appleand other growth stocks. In addition, Walmart has increased its dividend for more than 50 years in a row, making it a Dividend King.
Walmart has a clear plan to grow profits and increase the dividend, but its shares have become more expensive and the yield is only 1.2%.
Tool and outdoor products maker Stanley Black & Decker (NYSE: SWK) is also a Dividend King. But the stock is down more than 10% in the past three months and a painful 57% in the past three years. Here’s why Stanley Black & Decker is out of favor, how it’s turning things around, and why it’s worth buying now.
An Introduction to Stanley Black & Decker
Stanley Black & Decker sells a variety of hand tools, power tools and accessories under brands such as DeWalt, Stanley, Black+Decker, Craftsman and others.
A staggering $13.4 billion, or 85%, of 2023 revenue came from the tools and outdoor segment, while only $2.4 billion came from the industrial business-to-business (B2B) segment. Sixty-two percent of 2023 sales were generated in the U.S. As such, the company has been hit hard by inflation, higher interest rates, weak consumer spending, and a challenging housing market. Meanwhile, other industrial companies that primarily engage in B2B sales, such as General Electrical And Siemens — hovering around all-time highs.
Peaks and valleys
Stanley Black & Decker has been on a rollercoaster in recent years. The country reached a record high of $1.69 billion in 2021, but lost a record $311 million in 2023. The following graph clearly illustrates this dramatic picture.
You may wonder how a company can go from a period of growth and expansion to a period of weakness in just a few years. The short answer is that the COVID-19 pandemic threw a spanner in the works for the toolmaker, disrupting supply chains and consumer behavior. Initially, Stanley Black & Decker benefited from an increase in spending on goods, which is reflected in the 2021 results. But in 2022 it became clear that demand was only increased by a few years and the boom was unsustainable.
Stanley Black & Decker’s operating costs rose to keep pace with demand. But as demand fell and revenues began to decline, those higher costs ate into margins. In 2023, Stanley Black & Decker had an operating margin of just over 4%, compared with a pre-pandemic margin of around 12% to 14% — illustrating how inefficient the company has become.
Getting back on track
The company has implemented a massive cost-cutting program to restore margins, with a goal of achieving an adjusted gross margin of 35% in the long term and 30% for the full year 2024. Stanley Black & Decker achieved pre-tax cost savings of $145 million in the most recent quarter, bringing total cost savings to $1.2 billion since the program launched in the second quarter of 2022.
Stanley Black & Decker has remained on track to meet its goals. When it first announced the program, it targeted $1 billion in pre-tax savings by the end of 2023 and $2 billion in savings within three years. During its first-quarter 2024 earnings call, Stanley Black & Decker said it was still targeting $1.5 billion in pre-tax savings by the end of 2024 and $2 billion by the end of 2025.
Reducing inventory is another focus for the company. Stanley Black & Decker is forecasting a full-year inventory reduction of $400 million to $500 million and capital expenditures of just $400 million to $500 million. Reducing inventory and tightly restricting spending should help the company reach its full-year free cash flow target of $600 million to $800 million. That’s still a far cry from the $1.08 billion in free cash flow the company earned in full-year 2019, a good benchmark given the time before the pandemic disrupted its business.
A high return with a (potentially) cheap valuation
The 2024 FCF guidance would allow Stanley Black & Decker to cover its dividend with FCF. Last quarter, Stanley Black & Decker paid $121.8 billion in dividends. Over the past few years, the company has raised at least $0.01 per share per quarter in dividends to maintain its status as Dividend King – which is understandable considering the company is undergoing a turnaround. Therefore, investors should also expect minimal increases in the coming years, meaning annual dividend outlays for 2024 and 2025 should be below $500 billion.
A lower share price combined with a slightly higher dividend has seen Stanley Black & Decker’s yield rise to 3.8%, significantly higher than the 2% investors were getting before the pandemic.
Given its net loss in 2023, Stanley Black & Decker currently has a negative price-to-earnings (P/E) ratio. However, analyst estimates reflect the impact of its cost-cutting efforts and a return to profitability. Average analyst estimates are for EPS of $4 in 2024 and EPS of $5.48 in 2025. Based on 2025 EPS guidance, Stanley Black & Decker would have a P/E of just 15.5 – dirt cheap for a Dividend King. However, a lot can go wrong between now and when that full-year 2025 figure comes in – so investors shouldn’t rely on analyst estimates.
Stanley Black & Decker is worth the wait
Stanley Black & Decker has handled the COVID-19 pandemic, supply chain disruptions and interest rates poorly. And the stock price reflects these mistakes – as it is only about 15% away from its 10-year low. However, the company has done a good job of sticking to its cost-cutting plan over the past seven quarters.
In the near term, Stanley Black & Decker’s FCF projections indicate confidence that it can support its dividend with cash. In the medium term, a return to profitability and earnings growth makes the stock look like a good value.
Even as the company recovers, investors shouldn’t expect the company to drastically increase its dividend or buy back shares. The balance sheet has weakened in recent years due to higher debt. S&P WorldwideThe company’s annual review on June 20 gave it an A rating, which is good but could be improved.
In times like these, it’s important to zoom out and think about where a company will be in three to five years. If Stanley Black & Decker can return to its pre-pandemic form and chart a path to growth, its valuation and yield will make the stock too cheap to ignore. Patient investors may want to buy shares of Dividend King now, while others may prefer to wait and see to ensure Stanley Black & Decker can operate effectively under a leaner business model.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Microsoft, S&P Global, and Walmart. The Motley Fool recommends the following options: long $395 Jan 2026 calls on Microsoft and short $405 Jan 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
Walmart is a rock-solid dividend king, but so is this high-yield dividend stock that is down 11% in the past three months. Originally published by The Motley Fool
