The industrial sector is highly cyclical, so the fear of a recession tends to send stocks here, like Stanley Black & Decker (SWK 2.81%), lower. In fact, the Industrial Select Sector SPDR Fund is down around 9% so far in 2022. But Stanley Black & Decker is off even more, with the stock losing nearly 50% of its value. What's going on here?
Normal ups and downs
The economy swings between growth and contraction. And based on human nature, that's unlikely ever to change. Recessions, as contractions are called, can be particularly hard on industrial stocks. In general, these companies sell products to other companies. When end demand falls, the impact quickly travels right up the supply chain.
And there's often an extra hit in the industrial space because businesses tend to pull back on big capital spending projects when times are tough. Investment generally doesn't pick back up until there's clear end-market demand again.
Image source: Getty Images.
So it isn't shocking, given the worries about a recession today, that industrial stocks have been weak. However, Stanley Black & Decker has been a glaring standout to the downside: The stock's year-to-date loss is over five times as bad as the broader industrial sector.
To some degree, that's not a shock, given that the company has lowered its 2022 guidance twice so far. The change has not been small, either, with the low end of the adjusted earnings range falling from $12 per share at the start of the year to just $5 today. No wonder investors have been so pessimistic about the company.
The issue to consider
The problem for Stanley Black & Decker is that, compared to most of its peers, it is materially more exposed to consumers. The company's core products are tools and other power equipment. These are sold in places like hardware stores, which attract both the professionals that directly serve individual customers and individuals themselves. Two major U.S. hardware retailers, combined, accounted for a huge 30% of the company's sales in 2021.
As the economy cools off, the company is clearly seeing demand drop, but that makes sense given its core products. Stanley Black & Decker has always been focused on toolmaking, and it is selling noncore businesses to further focus on these operations. It is a dominant force in selling tools and clearly likes the niche.
NYSE: SWK
Key Data Points
History suggests that the company knows how to deal with the ups and downs of its business while still rewarding investors well. As proof, the dividend has been increased annually for over 50 consecutive years, making Stanley Black & Decker a member of the highly elite Dividend Kings club. And it just announced a token penny-a-share dividend hike, too, hinting that management believes it can work through this rough patch while keeping its dividend streak alive.
Inflation is another headwind hurting Stanley Black & Decker's performance, so there is more going on here than just a heavy consumer focus. Rising costs are putting added pressure on margins. However, that's hardly unique, it is as issue that all industrial companies are facing. Like peers, Stanley Black & Decker is increasing its prices and cutting costs.
Still, when the economy turns higher again, as it has historically following a recession, consumers are likely to start spending before businesses do. That means that Stanley will probably see its business rebound more quickly than its industrial peers. So the huge stock drop, which has pushed the yield up toward the high end of its historical range, is probably a buying opportunity for long-term dividend investors.
Worth a close look
If you can handle some near-term uncertainty as the economy faces down a potential recession (there have already been two quarters of negative GDP growth, which has been a bellwether of a recession), then Stanley Black & Decker and its historically high 3.3% yield will probably be worth examining.
Business results might get worse before they get better, but Dividend Kings don't go on sale very often, and it's better to buy near the bottom than to completely miss the opportunity waiting for the perfect price.
