There are variations on the theme here, but one of the most provocative sayings on Wall Street is that you should buy when there's blood on the Street. That's definitely the case today with toolmaker Stanley Black & Decker (SWK 0.99%), a stock that has declined by more than 50% this year alone. But here's the interesting thing: That drop has pushed the dividend yield to a historically high 4.1%, suggesting that this Dividend King is cheap. Here are some key facts to think about before you let fear stop you from buying the stock.
1. The products aren't optional
This might sound simple, but you can't build things without tools. So the products Stanley Black & Decker makes are necessity items. This is no small matter. Indeed, although Stanley Black & Decker is an industrial stock, the entire consumer staples space is so attractive because people need things like toothpaste, deodorant, and soap on a regular basis. To be fair, industrial tools last a long time so the comparison to a consumer products company isn't perfect, but tools do wear out and need to be replaced regularly. And then there are consumables, like saw blades, that are just as frequently changed as, say, razor blades.
Image source: Getty Images.
But the bigger takeaway here is that, even if demand for Stanley Black & Decker's products falls over the short term, it isn't going away over the long term. That provides a solid base for the business and gives management material leeway when it comes to working through rough patches.
2. Working on it
A rough patch is exactly what this industrial stock is in right now. There's a reason the shares are down so much in 2022. Most notably, the company has drastically slashed its full-year sales and earnings guidance. In fact, guidance was reduced by about as much as the stock has declined, which perhaps makes some logical sense.
However, the company isn't just sitting around and hoping for better days. It has implemented a $2 billion cost-cutting plan and is increasing prices to combat inflation. This is exactly what you'd expect management to do in the current environment and hints that, if things go reasonably well, the business will eventually get back on track -- even if it takes a few years.
To be fair, Stanley Black & Decker's leverage has increased materially over the past year or so, too, thanks at least partly to acquisitions. A fact that has investors worried. For example, it's debt to equity ratio is currently around twice its historical norms. Short-term debt has also ticked up appreciably, which is a problem since refinancing those loans will be taking place in a rising interest rate environment.
However, with an investment grade rated balance sheet, it is likely that the company will be able to work with its lenders and, given the company's long and successful history, get leverage back down to more normal levels over time. Notably, it has been selling non-core operations with at least part of the proceeds dedicated to debt reduction. In other words, it is aware of this issue and dealing with it.
3. Hard times aren't new
SWK Dividend Yield data by YCharts.
The bigger picture here, though, is that Stanley Black & Decker has increased its dividend annually for 55 consecutive years. And it has paid a dividend for 146 years. This company clearly takes rewarding investors via dividend payments very seriously. But step back and think about the last 55 years, which includes the Great Recession, the 2000 tech bubble, and raging inflation in the 1970s, among many other headline-grabbing and fear-inducing events and times. The past 146 years, meanwhile, also includes multiple World Wars and the Great Depression.
Stanley Black & Decker remained committed to its dividend all along the way. And the last increase was in September after 2022's problems had come to the fore, suggesting that management sees the current headwinds as a temporary setback. The dividend track record suggests that long-term investors should probably give Stanley Black & Decker the benefit of the doubt with its current problems.
4. Quick on both sides
Time, however, could be of the essence if you want to buy Stanley Black & Decker with a historically high yield. That's because its business has material exposure to consumers, who generally pull back more quickly than professional and industrial customers. This is what the company is seeing in its numbers. The thing is, consumers tend to jump back into buying more quickly as well. So the swift stock decline this year could eventually turn into a swift stock rally when the economy begins to strengthen again. That, of course, depends on demand for Stanley Black & Decker's tools rising along with the economy, but history suggests that's a realistic expectation.
Time is of the essence
Things can always get worse before they start to get better, so there's no way to know exactly when it will be the perfect time to buy a stock. However, Stanley Black & Decker looks historically cheap today even as it works to deal with the headwinds it faces in what is, basically, a necessity business. When Dividend Kings like this go on sale, it's often better to be about right than miss an opportunity because of fear or, worse, trying to time a rebound perfectly. If you are looking for a reliable dividend stock, Stanley Black & Decker should be on your short list right now.
