Dividend Aristocrats Part 1 Of 52: Stanley Black & Decker, Inc. (SWK) by Sure Dividend
Starting in September of 2014, I analyzed every Dividend Aristocrat stock in detail. You can see the results of the analysis at this link.
It has been just over a year since that time. The S&P 500 has been turbulent since September of 2014. Oil prices have crashed. The global economy is threatening to stall.
A full 4 quarters have passed since the last Dividend Aristocrats analysis. It is time to analyze all 52 current Dividend Aristocrats again.
Last year, the Dividend Aristocrats series started with Stanley Black & Decker (SWK). We will start the analysis off this year with Stanley Black & Decker as well.
Business Overview
Stanley Black & Decker is a diversified industrial goods manufacturer with a $15.3 billion market cap. The company was founded in 1843 in Connecticut.
Stanley Black & Decker has paid dividends for 139 years – and increasing dividends for 48 consecutive years. The company’s dividend streak is nothing short of amazing.
The company operates in 3 segments:
- Tools & Storage (62% of total revenue)
- Industrial (18% of total revenue)
- Security (20% of total revenue)
Geographically, Stanley Black & Decker’s revenue breaks down as follows:
- Emerging Markets (17% of total revenue)
- United States (49% of total revenue)
- Rest-Of-World (9% of total revenue)
- Europe (25% of total revenue)
The image below shows the company’s revenue breakdown graphically.
Competitive Advantage
Stanley Black & Decker has paid increasing dividends for 48 consecutive years. That simply does not happen without a strong competitive advantage.
All 3 of the company’s segments are either #1 or #2 in their industry. This is a result of the company’s strong brands – especially the Stanley brand.
In brand-based, highly competitive industries like packaged food products, companies regularly spend 5% to 10% of revenue on advertising. Stanley Black & Decker has built its brands with significantly less advertising spend. The company has spent around $120 million a year in each of its last 3 years on advertising. This comes to around just 1.1% of revenue spent on advertising.
Despite its low advertising spend, the Stanley and Black & Decker brand names are well known. They have been built in large part on the incredible longevity of Stanley Black & Decker, and the quality of their products.
In addition to its strong brands, Stanley Black & Decker has a dogged focus on efficiency. The company’s management often discusses its ‘Stanley Fulfillment System’ – which is the company’s name for its focus on efficiency and providing value to customers.
Growth & Total Returns
Over the last decade, Stanley Black & Decker has compounded its earnings-per-share at 5.6% a year and its dividend payments at 6.7% a year.
Stanley’s 2010 merger with Black & Decker changed the company significantly. Since 2010, the company’s earnings-per-share have been growing at 7.9% a year.
With earnings-per-share growth of around 8% a year since the merger, one would think Stanley Black & Decker’s management would target earnings-per-share growth of around 7% to 9% a year – in line with historical numbers… But that is not the case. The company’s management is painting a far rosier picture.
Stanley Black & Decker is targeting 10% to 12% earnings-per-share growth over the next 3 years. The company plans to achieve this growth through:
- Organic revenue growth of 4% to 6% per year
- Acquisition revenue growth of 3% to 4% per year
- Increase operating margins
- Share repurchases of around 15% of free cash flows
CEO John Lundgren has managed to grow total revenue (including acquisitions and organically) at about 7% a year since his first full year (2005) as CEO. The company is now targeting 7% to 10% a year total revenue growth. I find it far likelier that the company will manage to grow revenue at between 6% and 8% a year over the next several years. This is more realistic and in line with historical growth from Stanley Black & Decker.
Stanley Black & Decker has also not been able to meaningfully improve operating margins over the last decade, despite continuous restructuring attempts. In 2005, Stanley Black & Decker had a net profit margin of 8.3%. By 2014, net profit margin had fallen to 7.6%.
Since the Stanley / Black & Decker merger, the company has reduced its share count by about 1.5% a year. I expect the company to continue repurchasing shares at around this clip over the next several years.
Together, share repurchases and revenue growth give Stanley Black & Decker an expected earnings-per-share growth rate of 7.5% to 9.5% a year.
In addition, the company currently has a dividend yield of 2.2%. This gives Stanley Black & Decker investors expected total returns of 9.7% to 11.7% a year going forward.
Recession Performance
Stanley Black & Decker’s long dividend streak shows that the company can withstand recessions.
With that said, Stanley Black & Decker did see earnings-per-share decline during the Great Recession of 2007 to 2009. The company’s earnings-per-share over this difficult period and subsequent recovery are shown below:
- 2007 earnings-per-share of $4.00 (EPS high at the time)
- 2008 earnings-per-share of $3.41 (15% off EPS highs)
- 2009 earnings-per-share of $2.72 (32% off EPS highs)
- 2010 earnings-per-share of $3.96 (nearly full recover)
- 2011 earnings-per-share of $5.24 (new EPS high at the time)
As you can see, Stanley Black & Decker saw earnings-per-share declines of 32% during the worst of the Great Recession. The company hit new earnings-per-share highs by 2011.
Stanley Black & Decker sells products which its customers can put off purchasing. As a result, it is not recession resistant. Click here to see the 10 most recession proof Dividend Aristocrats.
Valuation & Final Thoughts
Stanley Black & Decker has an average price-to-earnings ratio of about 15 over the last decade. The company is currently trading for a price-to-earnings ratio of about 17.4 using adjusted earnings-per-share.
As a result, Stanley Black & Decker appears to be slightly overvalued relative to its historical averages at current prices. Simply put, now is not a particularly opportune time to purchase shares of Stanley Black & Decker.
Stanley Black & Decker is a high quality business with a long dividend history. The company is not particularly recession resistant, but it does have solid growth potential. In addition, management is shareholder friendly and regularly engages in share repurchases.
In the final analysis, Stanley Black & Decker is a hold at current prices. The company’s average growth over the last decade and average dividend yield prevent it from ranking particularly high using The 8 Rules of Dividend Investing.
