Stanley Black & Decker (SWK, Financial) is named after its co-founders, Frederick Stanley, Duncan Black and Alonzo Decker. Stanley Black and Decker is the result of two companies, Stanley Works and Black & Decker, combining in 2010.
In 1843, Frederick Stanley started a shop in New Britain, Connecticut, to manufacture bolts, hinges and other hardware. His products became renowned for their high quality. Stanley continued to innovate to come up with new products and grow the business.
Black and Decker traces its roots to Duncan Black and Alonzo Decker, who started their own hardware shop in 1910. In 1916, they obtained the world’s first patent for a portable power tool.
Eventually, the two companies joined forces. Stanley Black & Decker is a Dividend Aristocrat and has increased its dividend for 49 years in a row. Only businesses with at least 25 years of consecutive dividend increases qualify to make this exclusive list. You can see all 50 Dividend Airstocrats here.
Keep reading to learn more about the investment prospects of Stanley Black & Decker.
Business overview
Stanley Black & Decker is an industrial manufacturer of tools, storage and security products. It has a $17 billion market cap and generated more than $11 billion of revenue last year.
It operates three businesses:
- Tools & Storage (64% of total sales)
- Security (19% of total sales)
- Industrial (17% of total sales)
Stanley Black & Decker has a significant international presence. Its products are sold in 212 countries around the world. The company collects nearly half of its revenue from outside the U.S.
Source: 2015 Annual Report, page 4
Stanley Black & Decker’s revenue rose from $2 billion in 2000 to $11 billion last year. From 2000-2015, Stanley Black and Decker stock returned more than 400% to its investors.
Last year, the company increased earnings per share by 5%. There is a lot of potential for earnings growth to accelerate going forward.
Growth prospects
Stanley Black & Decker has a demonstrated track record of steady growth over time. For example, from 2006-2015 the company increased its earnings per share by 5.5% compounded annually.
Moving forward, Stanley Black & Decker's management has set ambitious—but still attainable—goals for future growth.
Source: 2015 Annual Report, page 5
One could argue that management’s forecast is too aggressive. Projecting 10%-12% total revenue growth seems high, particularly when the company’s total revenue declined 1% last year.
However, it is important to note that the revenue decline in 2015 was entirely due to currency fluctuations. As a global company, Stanley Black & Decker is being weighed down by the strong U.S. dollar.
Unfavorable currency fluctuation wiped out 7% of revenue growth last year for the company.
Stanley Black & Decker actually generated organic revenue growth of 6% last year, which indicates the demand for its products remains strong.
Stanley Black & Decker’s primary growth catalyst will be expansion in new geographic territories. It intends to accomplish this mainly through acquisitions. Management expects to dedicate 50% of future annual free cash flow for acquisitions.
Stanley Black & Decker recently acquired Newell Tools for $1.95 billion. The acquisition further expands Stanley Black & Decker’s international exposure, as 40% of Newell Tools’ revenue comes from outside North America.
Source: Newell Acquisition Presentation, page 5
Focusing on growth in emerging markets is a good long-term strategy. These are markets where economic growth exceeds that of developed markets like the U.S.
For example, last year Stanley Black & Decker generated 9% organic revenue growth in Latin America. Over the long term, management wants to generate more than 20% of the company's revenue from emerging markets.
Competitive advantages & recession performance
Two key competitive advantages for Stanley Black & Decker are its brand strength and global scale.
Source: 2015 Annual Report, page 10
Stanley Black & Decker has a leadership position in each of its three product categories. Its brand strength gives the company pricing power, which leads to high margins.
Last year, the company expanded operating margins in the core Tools & Storage segment by 110 basis points. Last year, the Tool & Storage business generated record operating margins for the second consecutive year.
Stanley Black & Decker’s long history of paying consistent dividends each year proves it has a durable business model.
At the same time, the company did experience deteriorating fundamentals during the Great Recession. The steep recession had a clear impact on the company, as shown:
- 2007 EPS of $4.00 (EPS high)
- 2008 EPS of $3.41 (15% decline)
- 2009 EPS of $2.72 (32% decline from 2007 high)
- 2010 EPS of $3.96 (close to reclaiming 2007 high)
- 2011 EPS of $5.24 (new EPS high)
As an industrial manufacturer, Stanley Black & Decker is not immune from global recessions. But despite the 32% peak-to-trough decline in EPS during the Great Recession, the company quickly recovered. Its EPS grew to a new high in 2011.
Valuation & expected total return
Stanley Black & Decker stock is valued at a price-earnings ratio of 17.7. It is cheaper than the S&P 500, which has a price-earnings ratio of 24.0.
However, the picture changes when compared with its historical valuation. Since 2000, Stanley Black & Decker has had an average price-earnings ratio of 14. From this perspective, the stock appears slightly overvalued.
Stanley Black & Decker has excellent growth prospects. EPS growth could be comprised of:
- 4%-6% organic revenue growth
- 3%-4% revenue growth through acquisitions
- 2% share repurchases
This would result in 9%-12% EPS growth. In addition, Stanley Black & Decker has a 2% current dividend yield.
With this in mind, total shareholder returns could be expected to reach 11%-14% annually going forward.
Final thoughts
Stanley Black & Decker is a blue-chip industrial manufacturer. It has strong brands and operates a highly profitable business model.
That being said, dividend growth investors may not see this as a good buying opportunity right now. Stanley Black & Decker stock is overvalued relative to its historical valuation. In addition, its 2% dividend yield is slightly below the average dividend yield of the S&P 500.
As a result, dividend growth investors may want to wait for a better price before buying the stock. The company does rank not rank particularly well using The 8 Rules of Dividend Investing, but is a long-term hold.
Disclosure: I am not long any of the stocks mentioned in this article.
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