Investing is not an easy thing to do, partly because emotions are a major driver of human action. Yet, if you can step back, emotional Wall Street price swings can present buying opportunities for long-term investors. Right now, 3M (MMM -1.05%) and Stanley Black & Decker (SWK -0.52%) are both trading with historically high yields, suggesting they are cheaply priced. Which one is the better option today? Here are some things to consider.
1. Dividends
Stanley Black & Decker's yield is around 3.3% today. 3M's dividend yield is roughly 4%. If you're only looking at yield, then clearly 3M is the winner of this contest. But that's not the only thing you should consider.
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Stanley Black & Decker has increased its dividend annually for 55 consecutive years, making it a Dividend King. 3M has increased its dividend annually for 64 years and counting. Stanley Black & Decker's dividend growth over the past decade averaged 6.5%, while 3M's averaged around 10%. Again 3M looks like the winner, but both of these industrial names made only token one-cent-per-share increases when they last hiked the payments because of the current problems they face.
2. Business model
3M is a diversified giant, with businesses spread across healthcare, consumer, safety and industrial, transportation, and electronics. It is in the process of splitting off its healthcare business as a separate entity, but if you buy the stock today you will get the benefit of that spin-off. Thus, you'll still have all four businesses in your portfolio.
Stanley Black & Decker is far more focused, making tools and industrial fasteners. In fact, it recently sold off a couple of businesses, increasing the importance of its core operations. There's generally more risk in a more focused business, so 3M probably comes out ahead again.
3. The problems
3M's shares are down 40% since peaking in 2018. Stanley Black & Decker's stock is off by around 50% in 2022 alone. Those kinds of price moves don't happen by accident; both of these industrial companies are facing big headwinds.
Stanley Black & Decker's drop is largely related to the fact that it has cut its earnings guidance in half since the start of the year. When 2022 began the company was expecting adjusted earnings to fall between $12 and $12.50 per share. Halfway through the year, that range had dropped to just $5 to $6 per share. With that backdrop, it makes sense that investors have been downbeat. A big part of the problem is that Stanley Black & Decker's core business is highly tied to consumer spending (it sells a lot of its products through hardware stores, for example). With the fear of a recession coupled with high levels of inflation, the company's near-term prospects are, indeed, a little bleak.
3M, meanwhile, is dealing with lawsuits and environmental issues. Both are likely to be costly and linger for many years. In fact, 3M hopes to push one of the impacted divisions into bankruptcy to try to keep legal costs from burdening the rest of the company. This is not going to be easily solved, and the environmental clean-up won't be, either. So, in many ways, 3M's problems are more material in nature, noting that Stanley Black & Decker's retail-focused business should pick back up again as soon as the economy does.
Neither is bad, but one is better
To be fair, 3M is likely to survive the current headwinds it is facing, so it's not a terrible investment option. It is, however, likely to be a highly uncertain one over the next couple of years, given the legal and environmental issues. Stanley Black & Decker, on the other hand, is far more simple to understand and categorize. Yes, near-term results will be weak, but it should get back on its feet relatively quickly once economic activity rebounds. Because of this, conservative dividend investors will probably find it more attractive than 3M despite its lower dividend yield.
