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Brian Bollinger
Brian Bollinger
Articles (135)  | Author's Website |

Stanley Black & Decker: 139 Years of Dividend History

Power tools company is a high quality industrial stock trading at a reasonable price

January 27, 2016 | About:

Stanley Black & Decker (NYSE:SWK) has paid its dividend for 139 consecutive years and increased it for the past 48 consecutive years. In two years, SWK will join the exclusive dividend kings list, which consists of companies that have raised their dividend for at least 50 straight years.

These businesses are rare and typically possess numerous competitive advantages. In the case of SWK, the stock has also sold off by 15% since mid-December and trades at about 15x forward earnings, making the investment case even timelier for consideration in our Top 20 Dividend Stocks portfolio.

Business overview

Stanley Black & Decker was founded in 1843 and has grown into a diversified global provider of power and hand tools, products and services for various industrial applications, and security systems. The company sells over 500,000 products including power drills, saws, toolboxes, wrenches, fasteners, measuring tools, compressors, nail guns, outdoor power equipment, sanders, lamps, mowers, vacuums, workbenches, polishers, grinders, cordless tools, air tools, and more. Some of the company’s biggest brands are Stanley, DeWalt, Black+Decker, Porter Cable, and Bostitch.

SWK’s largest end markets by 2014 revenue are residential, repair and DIY (20%), new residential construction (15%), non-residential construction (17%), industrial and electronics (17%), automotive production (8%), and retail (5%).

By segment, SWK generated 62% of its 2014 revenue from Tools & Storage, 20% from Security, and 18% from Industrial.

By geography, SWK generated 49% of its 2014 revenue from the U.S., 25% from Europe, 17% from emerging markets, and 9% from the rest of the world.

Business analysis

SWK’s primary competitive advantages are its strong brands, product innovation, and global distribution channels.

SWK’s brands and reputation for quality were established a long time ago. The company obtained the world’s first patent for a portable power tool in 1916 and has since amassed an unparalleled family of brands, products, and industry expertise. Before going further, it’s worth mentioning that Stanley Works acquired Black & Decker in early 2010 to create the biggest toolmaker in the U.S. This deal combined the leader in consumer and industrial hand tools and security with the leader in power tools.

Today, SWK has over 13,000 active global patents and introduces about 1,000 new tool products per year, including many of the “world’s first” each year. The company has noted that new products drive over 85% of its organic growth, and NPD Data recognized the company for receiving the 8th most patents in the world from 2010 to 2014.

Innovation is a clear driver for the business, and SWK is able to leverage its brand equity into adjacent product categories for easy expansion. Most of its markets are extremely large and fragmented because they require so many different types of products (e.g. a home remodeling project could require saws, measuring tools, nail guns, vacuums, tools, drills, and more).

SWK can develop or acquire new products where it has gaps and market them under its famous brands. The company invested over $6 billion in acquisitions since 2002 to advance its growth opportunities, and we expect more of the same to continue over the next decade as it continues consolidating its markets.

SWK’s extensive distribution channels and shelf space are also advantages. Its products are in practically every home center and mass merchandise retailer because they have loyal customers, cover the broadest number of applications, and are proven to sell.

As a result, SWK has number one global market share across power tools and hand tools and number two market share in engineered fastening and commercial electronic security services. With leading market share positions, SWK’s scale also helps it manufacture products at competitive costs (although the company typically focuses on the higher end of the market where there is less price competition).

In the company’s Security (20% of sales) and Industrial (18%) segments, SWK’s business benefits from a partial recurring revenue model. It is tied to several large automotive companies that have selected SWK’s highly engineered fasteners for their models, and around 40% of the Security segment’s revenue is recurring in the form of software and monitoring services.

The company’s Stanley Fulfillment System (SFS) is another big advantage that has enhanced SWK’s operating discipline. SFS has five primary elements that work together: sales and operations planning, operational lean, complexity reduction, global supply management, and order-to-cash excellence. SWK develops business processes and systems to reduce costs and improve the company’s return on capital.

As an example, SWK was able to improve its working capital turnover by 56% from the end of 2010 to the end of 2014. This frees up more cash that can be used for acquisitions or returned to shareholders through buybacks and dividend increases.

Over the next three years, SWK targets 4% to 6% organic sales growth and expects to resume acquisitions (during 2013, SWK placed a moratorium on acquisitions to focus on near-term priorities of operational improvement and deleveraging). With continued margin expansion and operating leverage, SWK expects earnings to grow by 10% to 12% per year.

Key risks

With strong brands and a well-diversified portfolio of products in slow-changing markets, it’s no surprise that SWK has successfully been in business for more than 175 years.

In our opinion, most of the risks faced by the company are related to currency fluctuations and macroeconomic trends. Construction and remodeling projects are two major business drivers which tend to move in cycles. In the U.S., 2015 was the best year for existing home sales since 2006, which suggests some of SWK’s business has been benefiting from unusually strong economic tailwinds. Should the housing market unexpectedly roll over, there could be a great buying opportunity.

However, we don’t see any secular themes playing out that would necessarily challenge long-term demand for SWK’s product offerings. If anything, the company’s capital allocation decisions are possibly its greatest risk.

After taking several years off from major M&A to fix an underperforming security business, improve operational efficiency, and deleverage, SWK expects to resume its acquisitive strategy over the next few years.

If management makes an untimely deal, takes on too much debt, buys a bad company, or unfavorably alters the company’s business strategy, the stock could suffer. For example, SWK acquired European security company Niscayah in 2011. The business started losing customers throughout the integration process and forced SWK to later miss earnings guidance.

Otherwise, we think SWK’s continued branding and product innovation investments will continue serving it well across its large and fragmented markets. It’s worth monitoring if customers begin switching to lower-priced products, especially in emerging markets, but brand loyalty seems to be pretty high across most of SWK’s product categories.

Dividend analysis

We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend.

Dividend Safety Score

Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

SWK’s dividend Safety Score of 66 indicates that the company’s dividend is very safe. With such an impressive streak of paying dividends, this should not come as a surprise.

Over the last four quarters, SWK’s dividend has consumed 43% of its earnings and 40% of its free cash flow. As seen below, the company’s payout ratios have generally remained between 30% to 40% over the last decade, which is in line with management’s 30% to 35% target. This is a relatively low payout ratio that provides plenty of dividend safety. Even if SWK’s cash flow was unexpectedly cut in half, it would still be more than enough to cover the dividend.

SWK EPS Payout Ratio

Source: Simply Safe Dividends

SWK FCF Payout Ratio

Source: Simply Safe Dividends

Observing a company’s performance during the last recession is also helpful when it comes to evaluating the safety of a dividend. We can see that SWK’s sales fell by 17% in 2009, and its earnings were down nearly 30%. The company clearly has some sensitivity to the broader economy, which isn’t too surprising given its exposure to construction markets.

SWK Sales Growth

Source: Simply Safe Dividends

SWK’s economic sensitivity isn’t as big of a risk to the dividend payment because the company’s payout ratios are relatively low and it has been a free cash flow machine over the last decade. As seen below, SWK has generated positive and stable free cash flow each of the last 10 fiscal years, the sign of a very healthy business.

SWK FCF

Source: Simply Safe Dividends

The business also generates a decent return on invested capital, which helps gauge the profitability and efficiency of a business. Companies with competitive advantages will generally earn returns in excess of 10%. Prior to the financial crisis and its acquisition of Black+Decker in 2010, which brought down SWK’s return on invested capital because it added substantial goodwill to the balance sheet, SWK earned double-digit returns.

SWK ROIC

Source: Simply Safe Dividends

Really the only strike against the safety of SWK’s dividend is the company’s balance sheet. While SWK does have an “A” credit rating from S&P, it has about $3.9 billion in debt compared to $293 million in cash on hand, which is less than the amount of dividends it paid last fiscal year ($321 million). The company needs to continue generating free cash flow, but its track record is excellent.

SWK Credit Metrics

Source: Simply Safe Dividends

SWK’s relatively low payout ratios, consistent free cash flow generation, and firm commitment to paying its dividend make it one of the safer payments available in the market. While we would prefer to see further deleveraging, SWK is still very healthy financially.

Dividend Growth Score

Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

SWK’s dividend Growth Score of 72 is above average and suggests that the company should be able to deliver solid dividend growth for many years to come. With 48 straight years of dividend increases, this probably comes as no surprise.

Dividend growth has averaged around 5% in recent years, but SWK’s 40% payout ratio and solid free cash flow generation provide plenty of room for continued increases. However, the company has a target payout ratio of 30% to 35% so near-term dividend growth will likely remain in the 4% to 6% range if we had to guess.

SWK Dividend Growth

Source: Simply Safe Dividends

Valuation

SWK trades at about 15x forward earnings and has a dividend yield of 2.3%, which is in line with its five-year average dividend yield.

Management believes SWK’s earnings can grow at 10% to 12% per year over the next three years. We think a mid- to upper-single digit earnings growth rate is reasonable over the long term considering the size of SWK’s markets and its many opportunities to leverage its brands and distribution channels.

Under this scenario, the stock’s valuation looks very reasonable and appears to offer 7% to 10% annual total return potential. For such a high quality business in today’s market environment, that doesn’t sound too bad.

Conclusion

As a blue chip dividend stock, SWK has one of the best dividend track records an income investor will find. Few companies have existed for 175 years, much less paid a dividend for 139 consecutive years. With continued product innovation and brand investment, we believe SWK’s products will be in demand for many years to come. The company will face its ups and downs depending on currency exchange rates and macro trends in key markets such as construction, but we expect its profits to continue marching higher over long periods of time. Given its long-term prospects, SWK appears attractively valued today.

Disclosure: The author has no position in SWK.

About the author:

Brian Bollinger
Simply Safe Dividends helps conservative dividend investors increase current income, make better investment decisions, and avoid risk. Brian Bollinger, CPA, runs Simply Safe Dividends and previously worked as an equity research analyst at a multibillion-dollar investment firm.

Visit Brian Bollinger's Website


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