Stanley Black & Decker (NYSE:SWK) is certainly a dividend investors' favorite. The company has paid one for 142 consecutive years and increased it every year for the last 52 years. In addition, management is committed to returning 50% of its free cash flow to shareholders though dividends while paying 35% of its earnings in dividends. Provided the company can grow, then so will its dividends. The question is: What kind of growth can investors expect in the future? By previewing the upcoming third-quarter earnings report, investors can gain a good insight into what to expect going forward.

Tariffs, consolidation, and growth strategy

These are three key words that investors need to think about when considering investing in Stanley. In a nutshell, the company's growth efforts -- coming from a combination of consolidating the tool industry and investing in acquisition-led growth and brand development -- have been held back by a mix of unfavorable currency movements, tariff impacts, and rising commodity costs. As such, the estimated organic revenue growth of 4% is only expected to translate into a 4%-7% increase in EPS to $8.50-$8.70. The analyst consensus is currently at $8.57.

A range of Craftsman tools laid out on a deck

Image source: Stanley Black & Decker.

It doesn't sound very impressive, particularly when you consider that the company plans to grow organic revenue by 4%-6% a year from 2020-2022, with EPS increasing 7%-9% a year organically and 10%-12% with acquisitions.

Unfortunately, there's not a lot Stanley can do about foreign currency, or the slowdown in industrial manufacturing that means it's now expecting a low-single-digit decline in its industrial segment (around 16% of 2018 revenue). Moreover, the trade war continues to hurt the company, with CFO Don Allan recently estimating a total of $450 million in external headwinds for 2019, up from the $390 million estimated on the second-quarter earnings call. Moreover, Allan expects further headwinds of some $200 million in 2019.

Clearly, the increase in estimated headwinds is going to pressure full-year earnings expectations, so don't be surprised if guidance is cut on the upcoming earnings call.

Does it matter?

The issue of near-term headwinds shouldn't unduly worry long-term investors provided they are likely to disappear in the future. After all, currencies fluctuate, raw commodity costs tend to be cyclical, and any resolution to the trade war and a concomitant lifting of tariffs will act as an immediate upside catalyst to Stanley's earnings potential.

Meanwhile, the company is doing a good job of handling current headwinds and even managed to expand operating margin in the second quarter to 14.8% from 14.2% in the same period last year, offsetting some $110 million of external headwinds. In addition, Allan outlined that he's prepared to take restructuring action in the future if the tariff environment gets worse.

The good news is Stanley continues to make underlying progress on its growth plans. For example, the rollout of the Craftsman brand (acquired from Sears Holdings for $900 million in 2017) outside of traditional Sears channels (including Lowe's and Amazon) and the expansion into complimentary markets such as lawn and garden products (through its investment in lawnmower maker MTD Products) offer exciting growth potential.

Management sees the company as the consolidator of choice and expects to drive margin expansion over time as it builds the value of the brands it's acquired in recent years, including Craftsman and the $1.95 billion purchase of the tools business (including the Lenox and Irwin brands) of Newell Brands

What to expect in the third quarter and beyond

Given that Allan recently told investors to expect more headwinds than previously anticipated in 2019, it's possible that he company could be forced to reduce its full-year earnings guidance. Moreover, the ongoing slowdown in industrial manufacturing will negatively impact its industrial segment (engineering tools and fasteners), so the key to maintaining near-term earnings guidance is likely to be how well pricing and cost-control actions can help offset the headwinds.

From a longer-term perspective, the stock remains an attractive option for income-seeking investors, not least if you believe the trade war will be resolved in the near future. Stanley faces some near-term headwinds, but they are likely to disappear in due course, leaving a business in growth and margin expansion mode. That's good news for investors looking for a company with a history, and a commitment, of returning cash to investors.