Finding great companies isn't as hard as you might think -- the Dividend Aristocrat list is a good starting place. The problem is finding great dividend-paying companies that are trading at attractive prices. One name that fits the bill today is deeply out-of-favor Stanley Black & Decker (SWK 1.72%).
That said, smart investors think long term and are comfortable going against the grain. Here's why this industrial giant is worth the risk.
Ouch! Stanley Black & Decker takes a hit in 2022
Stanley Black & Decker's stock has fallen around 50% so far in 2022. That's a huge decline in a very short period of time. That's particularly true given that the company isn't a meme stock or tech darling -- it makes tools and industrial fasteners. But there are some good reasons for the drop.
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At the start of the year, management was looking for adjusted earnings to fall between $12 and $12.50 per share. That would have translated to earnings-per-share growth in the 15% to 19% range, which is very attractive.
That range was cut to $9.50 to $10.50 when the company reported first-quarter earnings. And with the second-quarter earnings update, it fell even further, to a range of $5 to $6, less than half of what management expected as 2022 got underway. Worse, the story went from solid earnings growth to a big earnings decline from the $10.48 per share Stanley Black & Decker put up in 2021.
Basically, there's a very good reason for investors to be negative here. And yet, management just increased the dividend. It was a token penny a share, extending the company's over 50-year annual dividend raising streak for another year. The key was the message, which is basically that the company thinks it can muddle through the current headwinds like it has in the past.
This too shall pass
There's a lot going on today, but Stanley Black & Decker's biggest problems are inflation and material consumer exposure.
There's not much the company can do about the first one, which is impacting the entire industrial sector. Like other names in the space, it's working to pass its rising costs on while trying to cut expenses. Both are processes that take time to work through and, frankly, dealing with inflation is not a novel issue for a Dividend King like Stanley Black & Decker (that's a step above Dividend Aristocrat, but the way).
The company's exposure to consumers is, however, company specific. Most industrial stocks sell mainly to other businesses, but a lot of tools get sold through hardware stores, and consumer demand is a big factor. That makes Stanley Black & Decker highly reliant on short-cycle products, since consumers tend to ramp spending up and down far more quickly than companies.
The upshot is that Stanley Black & Decker's results often falter more quickly than those of its peers. That's what it is dealing with right now, complicated by inflationary pressures.
Given the impressive dividend history here and the recent dividend hike, however, long-term investors might want to give management the benefit of the doubt. For starters, the dividend yield is a historically generous 3.2%, suggesting the shares are attractively priced. And second, short-cycle industrial products tend to be among the first to rebound when conditions improve.
In other words, Stanley Black & Decker's drawdown could be shorter-lived than you might expect.
It takes a strong stomach
When a stock falls 50% and is massively reducing its earnings guidance, most investors would probably think about running for the hills. However, now that the damage is done, intrepid types willing to go against the grain should consider stepping in. The company has a strong history of success behind it, a great dividend track record (even during hard times), and it will likely be among the strongest performers when the economic tides turn. This Dividend King has seen tough times before, and there's no reason to doubt that it will survive this rough patch.
