The biggest attraction today among investors looking at Stanley Black & Decker (SWK 1.17%) is the stock's historically high 3.96% dividend yield. The list of negatives, meanwhile, is as long as your arm, making it hard to get excited about stepping into the stock. But, for investors that think in decades and not days, this industrial toolmaker could be a buy-and-hold dream.
The bad news about Stanley Black & Decker
Stanley Black & Decker makes tools, and its business is highly cyclical, moving up and down along with economic activity. Exacerbating the swings here is the fact that a large portion of its business is exposed to consumers, who tend to pull back on spending more quickly than the business customers that are more typical in the industrial sector. The current economic weak patch, which comes at a time of fast-rising inflation, is particularly difficult on the company.
To put some numbers on this, Stanley Black & Decker entered 2022 expecting adjusted earnings to fall between $12.00 and $12.50 per share. That number fell steadily all year and now sits at just $4.15 to $4.65 per share. When you see these numbers, it is easy to understand why the stock is down 57.4% this year alone.
Adding to the headwinds is that there's no easy fix. Stanley Black & Decker has to suffer through this weak period as best it can, making changes to help ensure it has a better future ahead. But Wall Street tends to think short-term, and the terrible earnings are attracting most of the attention today.
The good news about Stanley Black & Decker
The thing is, management isn't ignorant about what is going on. It is taking action, including a massive cost-cutting effort. The problem is that the $2 billion of cuts on the schedule won't be fully realized until 2025. Investors need to be patient, but it looks like there's a solid plan in the offing.
Meanwhile, the company is making specific decisions that are exacerbating today's earnings decline. For example, it has long production lead times and is currently sitting on expensive inventory that it needs to clear out. To do so, Stanley Black & Decker is slowing its production lines. This is a double whammy since higher-cost products are less profitable to sell, and reducing production means that costs are spread over fewer products, which further crimps margins. That said, once the company gets its inventories back in line and the high-cost inventory out of the system, things should start to improve.
Then there's the balance sheet, where investors worry about high levels of leverage. In the third quarter, the company used non-core asset sales to reduce debt by roughly $3.3 billion. That materially improves the company's financial strength and, thus, its ability to muddle through the tough times it currently faces. Notably, the dividend was increased in September, well after the current problems started to surface, suggesting that the company is confident it can survive today's headwinds and thrive again in the future. The company, for reference, is a Dividend King.
Meanwhile, exposure to consumers has a benefit. When economic activity starts to pick up, consumers tend to start buying more quickly than businesses. Thus, Stanley Black & Decker is likely to see a rapid business upturn that might end up surprising the investors that are so down on the stock right now.
Investing in Stanley Black & Decker right now takes a strong stomach
To be fair, Stanley Black & Decker probably isn't appropriate for every dividend investor. The problems it faces are real and dramatic, so you'll need to be able to think like a contrarian. However, with a historically high yield, this is the type of stock that long-term dividend investors should look at closely. If you can see past the next year or two, envisioning a return to more normal business performance, Stanley Black & Decker and its generous yield look pretty attractive right now.