Tool maker Stanley Black & Decker (SWK +5.30%) let investors down in a big way, with adjusted earnings guidance for 2022 having been reduced by roughly 50% since the start of the year. The stock has plunged by around 60% year to date. And given the volatile state of the broader market, there could be more downside to come. Here's why I bought the stock anyway.
1. Historically high yield
I'm a dividend investor with a bias toward value stocks. One of the tools I use to figure out if a stock is historically cheap is relative dividend yield. Given the massive stock drop in Stanley Black & Decker's shares, its yield is up to 4.2%. That's toward the high side of its historical range, suggesting the shares are, indeed, historically cheap right now.
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That doesn't mean the stock can't keep going down. In fact, the yield has been higher in the past. However, yield spikes like the one being seen today are pretty rare in the company's yield history and they tend to be fairly brief.
2. Long history of dividend increases
One other factor on the dividend front that's incredibly important for me is that Stanley Black & Decker is a Dividend King. That means it has over 50 consecutive years of annual dividend increases under its belt. The company clearly places a great deal of importance on returning value to shareholders via regular dividend increases. The last increase was a token penny a share a quarter, not surprising given the current business issues. However, it was announced in September, which suggests management is confident in the company's future dividend-paying ability.
3. Short business cycle
One of the problems that Stanley Black & Decker is facing today is that it has material exposure to consumers via tool sales in hardware stores. This is a bit unusual in the industrial space, where companies tend to sell to other companies. This gives Stanley Black & Decker what is known as a short-cycle heavy business because downturns tend to impact financial results quickly as consumers tend to rapidly pull back on spending. However, the flip side is that upturns in the business also tend to be quick, as consumers often ramp up spending as quickly as they pull it back. So if you don't buy when the opportunity arises, you can end up missing the chance.
4. Long-term endurance
Long-term investors need to think in decades, not days or weeks. Right now the economy is in a tough spot, but that's not exactly a new thing. Recessions come and go. Inflation comes and goes. Bear markets come and go. Fear is high today, perhaps for good reason, but eventually this too shall pass. So I fully expect Stanley Black & Decker's business to recover along with the broader market and economy as the pendulum swings back toward better days... eventually.
Given the company's incredible dividend history, it has seen tough times before and survived. I don't know when the shift will take place, but I know that I have an opportunity to buy a well-run company at a very attractive price right now.
NYSE: SWK
Key Data Points
5. Necessity products
Another factor that is reassuring is that Stanley Black & Decker sells tools, which are a necessity product. Try connecting two pieces of wood without a hammer, screwdriver, or, if you are particularly skillful, a chisel. That may seem like a silly example, but it shows just how important the company's products are to the world. I'm confident that demand isn't going away for the products this company makes.
6. Technological opportunity
Stanley Black & Decker is at the forefront of a technological revolution in the tool space. It is working to shift from corded electrical tools to battery-powered electrical tools. That's not new, per se, but the technology behind electrification is still advancing. And that means more and larger tools can be shifted over to battery power. I believe this is an opportunity to increase sales as customers replace older tools -- a nice tailwind that should support current and future results.
7. The company has a plan
Lastly, Stanley Black & Decker isn't sitting around waiting for things to improve on their own. It recognizes that there are problems and is working to reduce costs and streamline its operations. Management has laid out a three-year plan that it expects to produce $2 billion worth of cost savings. Clearly, it has to execute on that plan, but given the historically high yield, I believe I'm being paid well to wait for this corporate overhaul to play out.
No quick fixes
I bought Stanley Black & Decker fully aware that, given the bear market, I might have to suffer through more downside. That's not a great thing, but I'd rather be about right with my purchase than miss an opportunity to buy a great company at a discounted price. For now I'm going to focus on the historically high and reliable dividends I'm collecting while I wait for better days, but I do expect better days over the long term. If you can handle investing when others are fearful, you might want to jump aboard the stock as well.
