Is Stanley Black & Decker A Good Dividend Stock To Buy? (NYSE:SWK) | Seeking Alpha
This article will primarily focus on the dividend facet of Stanley Black & Decker (NYSE:SWK), an entity that has built up a strong name in the global tools industry. We also examine the forward valuations, and the technical backdrop to ascertain if SWK could be a rewarding play for prospective investors.
Examining Stanley Black & Decker’s Dividend Profile
It wouldn’t be fallacious to suggest that a lot of investors gravitate to the Stanley Black & Decker stock solely for its dividends. The image below – which highlights the variance between SWK’s total returns and its price returns (2.7x) – provides some context on what a crucial differentiator the dividend has been, whilst building wealth.
Also consider that not many industrial stocks can boast of the vast track record that SWK does. To contextualize things, we may consider looking at the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). Industrial stocks account for ~20% of the 66 stocks that comprise this portfolio. Within those industrial stocks, just four stocks (SWK is one of them), have been able to grow their dividends for over 50 years, highlighting what a difficult feat this is (SWK has done so for 55 years)!
Whilst SWK’s fidelity to its dividends is commendable, you do want a business to have the optimal capital structure, and reliable free cash flow generation to facilitate those dividends. This is where things get a little dicey with SWK.
Firstly, SWK is highly financially geared. The level of financial debt as a function of group EBITDA has typically come in at 3x, but recently it has been trading at levels of over 7x!
With such pronounced levels of financial leverage and weak cash generation, SWK won’t be in a great position to grow its dividends comfortably. We’ve seen some evidence of the slowing growth rate. Last year dividends, were hiked by ~13%, but more recently the hike has come in at a little over 1%.
I recognize that some investors could be concerned about a cut in dividends going forward, and whilst one can never rule things out, I do feel that SWK should have enough in the tank to cover its dividends in 2023 at least.
In recent quarters, SWK has been working hard to reduce its excess inventory position. In Q4, the bulk of the inventory reduction was tied to lower finished goods and goods in transit. Looking ahead, until Q3-23 at least, inventory reductions will likely be driven by production cuts (for some context, in Q4-22, production was 30% lower than the mean).
Q4 Presentation
In effect, the company is looking to generate $0.75bn to $1bn worth of cash inflow through these inventory re-sizing initiatives. This would also mean a return to a positive operating cash flow position in FY23, with an estimated range of $0.5b to $1bn.
SWK management is on record stating that their capital allocation priorities in the near term will be directed to the dividend, debt reduction, and internal investments, with buybacks taking a back seat. Thus, if one were to assume a stable base of shares outstanding (156.6m shares) and consider even a 1% hike in dividends (from $0.79 to $0.7979) that would result in a dividend cash bill of $497m which SWK would be able to cover, given their expectation of at least $500m of FCF in FY23 (potentially rising to $1000m).
Closing Thoughts- Is Stanley Black & Decker stock, a BUY, SELL or HOLD?
Given that Stanley Black & Decker is in the middle of a multi-year transformation program, and has also seen a few divestments, the company’s earnings profile could likely remain pressured this year as well. Indeed, on the Q4 call, management guided to a FY23 EPS range of just 0 to $2, which would imply a significant decline from the $4.62 EPS levels seen last year.
I recognize that the drastic attrition in the EPS trajectory may put off a few investors but if you’re prepared to dig in and stick around for the long haul, you could be rewarded handsomely, considering the relatively cheap forward valuations, and the risk-reward on the charts.
Just for some context, YCharts estimates for FY24 (which will capture a large part of the target accumulated supply chain transformation benefits of $1.5bn) show that group EBITDA margins could expand by an impressive 500bps YoY, hitting levels of 12.3% (higher by 180bps from the FY22 levels even). Meanwhile, the group EPS as well could surge to levels of $5.30, after a difficult FY23. That would translate to a very attractive forward P/E of just 14.5x, significantly lower than its historical average.
Meanwhile, certain developments on the charts, also suggest that this may represent an opportune point to consider a position in SWK.
Meanwhile, a current above-average dividend yield (the current yield is over 200bps higher than the stock’s long-term yield average of 2%) could also help provide some useful cushioning if further drawdowns are seen.
SWK also appears to be one of the promising industrial candidates that could benefit from potential mean-reversion momentum, as its relative strength (RS) vs the Industrial Select Sector SPDR Fund (XLI) looks overextended to the downside, trading close to 50% away from the mid-point of its 20-year range.
To conclude, the improving FCF trajectory, suitable valuations, and the risk-reward on the charts make SWK a BUY.
This content was originally published here.