The Dividend Aristocrats Index is comprised of businesses that have 25 or more years of consecutive dividend increases and meet certain size and liquidity requirements. There are currently 54 Dividend Aristocrat stocks available today. Over the next several weeks and months, I will analyze each Dividend Aristocrat individually over several categories including: growth potential, fair value, competitive advantage, and recession performance. The first Dividend Aristocrat that will be analyzed is the tool and security manufacturer Stanley Black & Decker (SWK, Financial).
Stanley Black & Decker operates in 3 divisions: Security, Industrial, and Consumer D-I-Y (CDIY). The CDIY division is the largest, with about 48% of total revenues. The security division generates about 22% of revenue, and the industrial division generates the remaining 30%.
Stanley Black & Decker still derives nearly half of its revenue from the U.S. The company’s emerging market operations contributed 17% to overall revenue in 2013. Stanley Black & Decker has a stated goal of generating 20% or more of total revenue from emerging markets. It is likely the company will reach its goal this year or next.
Competitive Advantages
Stanley Black & Decker has increased its dividend payments for 43 consecutive years. A business simply cannot increase its dividend for 43 consecutive years without a durable competitive advantage. Stanley Black & Decker has been able to turn back the economic forces of creative destruction and grow profitably for over four decades. I believe the company’s competitive advantage is derived from three sources:
Competitive Advantage 1: Strong Consumer Brands
Stanley Black & Decker owns several well-known consumer brands in safety and tools. The companies most well-known brands are Stanley, Black & Decker, and DeWalt. The picture below from Stanley Black & Dekcer’s investor relations page shows their full brand portfolio.
The company spends a great deal of advertising revenue making sure their primary brands stay relevant and generate as many views as possible. The company estimates it has generated 182 billion brand impressions. Sponsoring sports teams is the company’s primary means of exposure. Stanley Black & Decker has sponsorship in FC Barcelona, Chinese basketball, NASCAR, Major League Baseball, and others. Stanley Black & Decker’s strong advertising helps potential customers recognize the company and feel comfortable with its products.
Competitive Advantage 2: Industry Leading Size
Stanley Black & Decker is the largest publicly traded business in the machine tools and accessories industry with a market cap of about $14 billion. The company is the global market leader in both hand tools and power tools; Stanley Black & Decker has nearly 25% market share in both categories.
Source: Stanley Black & Decker Investor Presentation
The company’s large size gives it the ability to purchase smaller players in its industry and add them to its operations. Stanley Black & Decker’s management is committed to investing about 50% of free cash flow in acquisitions to bolster growth. The company’s large size and market leading position gives it the potential to acquire larger businesses than its competitors could with free cash flow alone.
Competitive Advantage 3: Stanley Fulfillment System
When Black & Decker acquired Stanley in 2010, the company gained more than a bolt-on tools brand. The Stanley fulfillment system seeks to reduce complexity and maximize working capital turns. The working capital turnover ratio is simply sales/working capital. The ratio shows how efficiently a business is generating sales with its working capital. Stanley Black & Decker’s working capital turn ratio has improved from 7.3 in 2011 to 8 for the full year 2013. The average ratio for the industrial industry is 6, and just 5.1 for the security industry.
Stanley Black & Decker’s lean manufacturing improvement cycle is boosting the company’s efficiency and reducing the amount of working capital the company needs as a percentage of sales. Excellence in manufacturing is the company’s third competitive advantage.
Growth Potential
Stanley Black & Decker generates the bulk of its sales in developed markets. I believe the company’s future growth will increasingly come from developing markets. Stanley Black & Decker management has stated they want to drive growth in emerging markets.
The company has significant opportunities in emerging market infrastructure and consumer do-it-yourself tools. Stanley Black & Decker has committed to investing 50% of its free cash flow in acquisitions. Targeted acquisitions in key emerging markets will help the company to establish greater market share in the developed region. Stanley Black & Decker’s strong free cash flows and large size give it the ability to invest cash flows from the developed world into the quicker growing developing world.
The company faces the challenge of building brand awareness in emerging markets on par with the developed world. The sponsorship of Chinese Basketball sporting events is a step in the right direction for the company, as it uses its tested strategy of advertising at sporting events in the developing world. Overall, management is targeting 4% to 6% organic growth for the entire company, with much of that derived from emerging markets.
Recession Performance
Stanley Black & Decker remained profitable throughout the recession of 2007 to 2009. The company did suffer declines in its earnings per share. In 2007, the company had record earnings per share of $4.00. By 2009, earnings per share had fallen to $2.72 per share. The company remains profitable during recessions, but is not completely immune to them as shown by its steep declines in earnings per share.
Fair Value
Stanley Black & Decker is trading at the high end of its historical P/E ratio. The company currently has a P/E ratio of about 24 which is above the market’s P/E ratio of around 20, and well above the market’s historical average P/E ratio of close to 15.
Stanley Black & Decker is an outstanding business that offers stability, so it make sense for it to trade at a slight premium to the market’s historical average. I believe the company’s fair P/E multiple is somewhere between 16 and 19 based on its competitive advantages and relatively average revenue per share growth rate of 5.5% per year over the last decade.
Final Thoughts
Stanley Black & Decker has growth opportunities in emerging markets. The company’s long dividend history and strong competitive advantages make the business' long-term prospects bright. Unfortunately, the stock appears to be somewhat overvalued at this time (as is much of the market). The stock is not so overvalued that it must be sold, but a few years of growth are already baked into the share price. I believe there are better options available for investors interested in Dividend Aristocrats.
