In 2018, when Stanley Black & Decker (SWK +4.61%) enters its 175th year of existence, the tools and storage giant will mark an operating stretch that fewer than 50 public companies in the world can claim. Its dividend has enjoyed an impressive run, too, with annual increases occurring in each of the last 50 years.
Below, we'll look at the safety of that long-running dividend and test the prospects for more market-beating income growth ahead.
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Impressive operating trends
Income investors have no reason to fear a deterioration in business trends. On the contrary, Stanley Black & Decker is enjoying healthy, and accelerating, revenue and profit gains today. Organic sales growth was 7% in the most recent quarter, which put the company on track to reach 6% for the full 2017 fiscal year, compared to the 4% growth it managed in 2016.
Meanwhile, the higher sales volumes, plus positive impacts from cost cuts and acquisitions, are helping Stanley's profitability expand, with both gross margin and operating margin rising over the past nine months. "Our recent portfolio actions," CEO James Loree told investors in late October, "are creating multiple opportunities for our businesses to deliver sustained above-market organic growth and operating margin expansion."
Loree and his team backed up those positive comments by raising their earnings target for the year and they now see profits rising by between 13% and 14%. That result would mark a solid acceleration over the prior year's 11% increase.
Strong earnings and cash coverage
Stanley's dividend commitment would be well covered by earnings even if profits weren't growing at their current double-digit pace. In fact, the payout took up just one-third of earnings in the most recent fiscal year.
That 33% payout ratio makes Stanley a bit stingier than most large dividend payers, who usually aim to return closer to 50% of earnings each year as dividends. Instead, Stanley executives' capital return goals involve returning 50% of profits to shareholders through both dividends and stock repurchases.
SWK payout ratio (TTM). Data by YCharts.
The company is an opportunistic purchaser of its own stock, having spent $374 million buying back shares last year but just $16 million through the first nine months of 2017. In any case, that spending means that it typically allocates less than half of its earnings to dividends, which leaves an ample cushion for income investors should an industry downturn hit the business.
How big of an increase ahead?
Cash flow results have been pressured this year by an acquisition spree that brought the Craftsman tool franchise into the portfolio in Stanley's biggest purchase since 2013. The main financial impact of that move on capital returns, though, has been reduced share buyback spending.
Going forward, management's plan is to continue its strategy of returning half of its earnings back to shareholders through a mix of dividends and buybacks, with the remaining portion going toward acquisitions and other growth initiatives.
The robust pace at which profits are rising and the fact that Stanley is on track to improve organic sales by 6% this year rather than the 4% the company originally targeted likely mean shareholders can expect a dividend hike in 2018 that's comparable to the 9% boost it announced in 2017.
