Stanley Black & Decker: Dividend King Will Return To The Ring In 2024

Joe Raedle

Stanley Black & Decker

I ever retrieve nan die-hard Black & Decker accomplishment saw and electrical drill successful my aged family house, that ever seemed to activity contempt years of deterioration and tear - and nan Irwin vice grips that sewage mislaid in nan plot during nan wintertime and recovered successful nan spring. There are standout brands wrong nan Power Tool businesses that see DeWalt, Irwin, MAC Tools, Craftsman, Black & Decker and Lenox. When I hunt for nan generic products astatine Home Depot, Lowe's aliases Amazon, their devices tends to travel up. That's what I want to spot successful a brand: it's connected buildings sites, my contractors person them erstwhile they travel to do a occupation astatine nan house, and they person beingness astatine cardinal hardware stores.

Stanley Black & Decker Brands (Stanley Black & Decker Website)

Stanley Black & Decker Website

Stanley Black & Decker, Inc. (NYSE:SWK) was founded successful 1843 and has go a family sanction successful powerfulness tooling, engineered fastening systems, and moreover infrastructure systems. They are a world-leader and person #1 marketplace stock successful some nan powerfulness devices manufacture (fairly good known) and pinch engineered fastening systems. Their manufacturing guidelines is global, pinch complete 100 sites group crossed 60 countries.

Stanley Black & Decker acquired Consolidated Aerospace Manufacturing successful 2020, which is simply a lead fastener and constituent level for nan aerospace industry. Imagine low- and high-pressure fluid fittings and systems that must beryllium approved for highly precocious tolerances and capacity standards, that waste for very compelling margins to nan likes of Airbus and Boeing.

We are going to look nether nan bonnet of SWK and - isolated from headwinds that are intelligibly weighing connected nan stock value - we for illustration what we see.

Fundamentals - Balance Sheet and Income Statement

The logic I statesman pinch an appraisal of nan financials is that it's basal to knowing whether this is nan type of business you would allocate superior to. To do so, we travel a group of study that Warren Buffett and Charlie Munger are known for using, which is covered successful Warren Buffett and nan Interpretation of Financial Statements by David Clark and Mary Buffett. The results person been simplified and summarized successful nan array below:

David Huston - Analysis Rubric

What's awesome astir pursuing a rubric is you tin debar "unconscious bias" erstwhile assessing nan viability of a business. The numbers don't often dishonesty successful mature businesses that are well-established. Stanley Black & Decker has fundamentally beardown profit margins and it's a profitable business. Depreciation and liking disbursal is rather low, it manages beardown and dependable increases successful gross and has an awesome usage of capital. Look astatine nan comparison betwixt PPE, indebtedness and nett earnings. The business has $2.3bn successful PPE, $6.7bn successful debt, and generated complete $520 successful free rate travel successful nan 4th quarter. It has been free rate travel ("FCF") antagonistic since January 2022 truthful this is simply a existent positive.

But we person to beryllium realistic astir nan headwinds. 2022 FY results were a paltry $170 cardinal successful nett income against a five-year mean of $1,087.5 million. We for illustration nan type of Stanley that produces a cardinal dollars of nett income per year, utilizing $6.7bn successful debt, and $2.3bn successful PPE and fundamentally we want to spot nan pathway that gets them backmost to that benignant of performance.

The reddish flags are simply areas wherever nan business is not holding up against a precocious watermark. Meaning: weaknesses successful nan balance sheet, income statement, aliases cash travel statement. SG&A disbursal aliases "Cost of Goods Sold" (COGs) is unusually high, and it's a worrying motion to spot it emergence importantly for 2 years running. They person fto costs get retired of control, and yearly COGs has gone from $9bn mean successful 2015-2020 to $10.4bn successful 2021 and $12.5bn successful 2022. It is nary surprise, then, that they person launched an fierce cost-cutting programme successful Q4 that intends to region $2bn successful costs by 2025. Management want to get backmost to a $10bn aliases little tally complaint for COGs expense.

That is not fatal successful and of itself. What's really going connected present is that Stanley improved their apical statement income and gross maturation - linked to nan pandemic, and group for illustration yours genuinely who rushed retired to bargain powerfulness devices for building decks, location betterment projects, and who hired builders to widen their houses. To do so, though, they added excessively overmuch to their costs of equipment sold, and that resulted successful a sizeable deed to their nett margins. Gross income held up beautiful good astatine $4.4bn and was comparatively level complete nan 5 twelvemonth period. It's accrued SG&A expense, liking expense, and different expenses that really took a crowbar to nett profit.

Debt to shareholder equity is precocious astatine 143%, but erstwhile you look astatine semipermanent debt, they've intelligibly had a emergence successful 2022 from $4.6bn to $5.35bn - truthful telephone it $750mn summation - nevertheless this will apt beryllium addressed arsenic they trim costs and streamline nan business, freeing up superior to trim nan debt. When you spell backmost to nan magnitude of net Stanley typically produces this is not a immense rumor yet.

Finally erstwhile we look astatine Net Earnings and EPS nan humanities inclination is strong, but nan caller Q4 capacity was beneath modular and represented a 18.9% summation successful costs of income against Q4 past year, which gobbled up each of nan profit. Investors want to determine what broadside of nan obstruction they beryllium on: is this inclination going to proceed aliases has SWK deed a group of costs roadblocks that they are going to activity around. We consciousness it is nan latter.

Valuation

Stanley Black & Decker has had a really reliable twelvemonth successful 2022, and they forecast that 2023 is going to beryllium difficult arsenic well. No surprise: removing $1bn successful costs by extremity of 2023 and $2bn by 2025 will require awesome effort. It tin thief to measurement backmost and observe nan bigger picture, though, successful really monumental nan guidance has been successful position of nan banal value against adjacent value:

Morningstar Quant - US Markets

Analysts astatine Morningstar Quant use a adjacent worth of $111.79. If you return a discounted rate travel ("DCF") attack to Stanley Black & Decker utilizing nan assumptions from their latest Q4 and extremity of twelvemonth filing, you tin get a beautiful akin image for wherever SWK's valuation sits utilizing a 5-year DCF Model:

That arrives astatine a adjacent worth of $103. Taking a blend of nan 2 gives you a adjacent worth of $107.37.

Using that figure, we get astatine a separator of information of 19.1%, which is beautiful adjacent to nan 20% people that - if we spell backmost to nan Ben Graham and Buffett days - represents an charismatic discount to compensate america for nan consequence of taking an investment.

Economic Cycle and Technical Analysis

But it helps to put this into context: Stanley has been paying a dividend for 146 years, and people responds to nan peaks and troughs of nan economical cycle. Their business is to supply tooling and request is linked to economical activity. This intends if we look backmost astatine nan monthly floor plan since 1981, we tin intelligibly spot that it follows that rhythm and experiences crisp drops erstwhile housing, and economical activity slows down:

Stock Charts

In truth - arsenic we person recovered pinch galore stocks - SWK responds really good to nan 6-month moving average, trim monthly. This intends that from a method position SWK is simply a bargain erstwhile it crosses complete its 6-month moving mean and a waste erstwhile it crosses beneath that level. Equally it has paid to beryllium an investor aft nan economical rhythm has turned and to bargain erstwhile it has corrected >50%.

If we zoom successful person you tin spot that SWK has conscionable - by nan tegument of its teeth - crossed supra nan 6-month moving mean (EWA). That worth is presently $86.82, and it is simply a fig that is trim monthly connected nan opening of each month. This represents a beardown mean word momentum signal.

Stock Charts

Dividend

The Dividend Kings are businesses whose stocks person paid accordant and consecutive dividends for astatine slightest 50 years.

SWK has paid a dividend for 146 years and had consecutive increases successful nan dividend for 55 years, since 1968. As investors learned pinch Royal Dutch Shell - that doesn't mean nan business won't get into financial turmoil and person to trim nan payout (thereby risking further equity value declines).

They did raise nan payout to $0.80 per stock successful September 2022 and truthful there's nary contiguous grounds that guidance intend to trim it. For instance, it hasn't been held dependable for respective years. The payout ratio is simply a patient 32.9%. That being said: we want to beryllium clear that for nan astir caller quarter, successful Q4, dividends were not covered arsenic they reported an operating loss. If that were to proceed into adjacent year, past dividend screen could beryllium a consideration.

We judge that Stanley will activity done nan challenges this financial year, return to profitability, and proceed to trim costs and statement up its equilibrium expanse while retaining nan dividend.

What nan Bond Market Says

When we look astatine nan enslaved marketplace and fixed income broadside of nan equation, Stanley's indebtedness retired to 2028 trades astatine a midpoint of $94 against a look worth of $100. The output to maturity connected their indebtedness is 5.66%. For nan very blimpish and risk-averse investors retired there, nan bonds could beryllium worthy looking at.

However fixed that nan risk-free complaint of return has crept arsenic precocious arsenic 4.93% for nan 6-month US treasury bill, we don't consciousness this is simply a awesome risk-reward pinch returns skewed successful favour of nan investor. What this really tells america is that nan consequence to nan equity position is comparatively debased and implies stableness from nan position of enslaved investors.

Overall Assessment

Stanley Black & Decker, Inc. has been unfairly punished by nan banal market. The business trades astatine a 19.1% discount to adjacent worth based connected respective assessments of cashflows including a 5-year DCF. It has an awesome way grounds of paying dividends and rewarding shareholders, a first marketplace advantage successful its manufacture and mostly beardown expertise to move its existent assets successful nan shape of PPE, and Debt, into tangible net that turn complete time.

That has been challenged precocious pinch rather mediocre operating capacity successful 2022 and nan astir caller update successful Q4. The business needs to aggressively trim costs and negociate its equilibrium expanse amended to return to nan position it was successful erstwhile to nan pandemic.

What really sways america is nan cyclical quality of Stanley Black & Decker, Inc. Layering into a position astatine these levels seems peculiarly attractive, particularly supra nan 6-month moving average. Investors could see a operation of purchasing a banal position successful SWK and trading cash-secured puts successful nan banal astatine these levels. Yields connected near-the-money rate secured puts that are 1-month retired are astir 3%, which for nan semipermanent investor provides nan imaginable to get nan banal astatine 4% beneath nan existent value levels.

David has worked arsenic a elder process betterment master and has extended acquisition helping FTSE 100 and Fortune 500 businesses to amended their efficiency, value and velocity of delivery. Over that aforesaid timeframe he has built up and manages a ample portfolio of stocks and bonds utilizing a operation of bottommost up basal and quantitative analysis. He is simply a personnel nominated pension head and has acted successful respective Trustee positions.