With just one quarter down in 2024, Stanley Black & Decker (SWK 2.13%) is finally starting to show some exciting progress on its turnaround plan. That doesn't mean it's complete, not by a long shot. But if you have $500 burning a hole in your pocket and you don't mind taking on a little risk, you'll want to examine this iconic toolmaker and Dividend King and its historically high 3.6% dividend yield. Here's why.
What went wrong at Stanley Black & Decker?
From a big-picture perspective, Stanley Black & Decker's earnings imploded after reaching record levels in 2021, when people were upgrading their homes as they worked from home because of the pandemic. Back then, adjusted earnings rose 30% year over year to $10.48 per share. Over the next two years, however, the industrial company's adjusted earnings plunged to end 2023 at a much less impressive $1.45 per share.
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There were a number of problems. The sales boost from the pandemic ended. Supply chains got upended as the world moved beyond COVID, increasing the company's costs. Inflationary pressures also resulted in higher salary expenses. Interest rates started to rise, leading to higher interest costs. And, this is the real lynchpin, a series of debt-funded acquisitions in prior years left the company in a weakened state to deal with all of these problems.
Management quickly got to work trying to fix the core issues it faced. That involved selling assets to reduce leverage and strengthen the balance sheet. The company also worked to streamline its business, culling redundant products and combining manufacturing facilities to make better use of its assets.
Meanwhile, it undertook a painful inventory reduction process that involved moving higher-cost products through the system even though it meant pressuring operating margins. There's still more to do, but much of the heavy lifting has been completed.
Stanley Black & Decker is turning a corner in 2024
In the first quarter of 2024, Stanley Black & Decker reported what would best be described as mixed results. For starters, quarterly adjusted earnings rose from a loss of $0.41 per share in the first quarter of 2023 to a profit of $0.56 per share this year. That is pretty clearly good news, but management tempered that story with an outlook that was less than positive, explaining that "we expect mixed demand trends to persist across our businesses in 2024."
And yet, at the same time, management stood behind its full-year adjusted earnings target range of $3.50 to $4.50 per share. That's a big reversal from the nadir reached in 2023. And it is backed by ongoing progress the company is achieving in expanding its gross margin. The company expects adjusted gross margin to improve further as the year progresses.
The steady improvement in the company margin is what shows that Stanley Black & Decker has probably turned the corner. Meanwhile, it remains a powerhouse in the tool segment, with iconic brands (such as DeWalt, Stanley, Black & Decker, and Craftsman) and an ongoing product innovation platform that is leaning into in-demand cordless products.
A recovering business supports a recovering stock
Stanley Black & Decker's stock price hit a low point in late 2022, since then it has trended largely sideways. Assuming that the company's business continues to improve, however, it could break out of its recent range and start to move higher again.
Even if the stock remains moribund for longer, the business appears to be past the worst of the overhaul. So the downside looks like it would be collecting a historically high yield from a Dividend King that's still in recovery mode. Getting paid well to wait for Wall Street to catch on to the improvements taking shape isn't all that bad an outcome.
