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Big yields and troubled businesses, but for long-term investors that could be just the ticket to long-term gains and generous dividend checks.
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Value investors will tell you that you have to be willing to go against the herd, buying stocks when other investors are selling them. That's definitely the case today with industrial icons Stanley Black & Decker (SWK 0.01%) and 3M (MMM 0.01%). Here's the bad news hitting each and why, if you have some spare cash in your brokerage account, you might want to hold your nose and buy them anyway.
As 2022 got underway, Stanley Black & Decker's management expected a fairly decent year. Management's guidance called for adjusted earnings to fall between $12 and $12.50 per share. That would have been an 11.5% increase, at the high end of guidance, over the $11.20 per share in adjusted earnings it brought in during 2021. Things didn't work out that way, with guidance falling in each of the first three quarters of the year. By the third quarter guidance was for adjusted earnings in 2022 to fall between $4.15 and $4.65 per share.
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Not surprisingly, the stock has fallen sharply. A notable part of the problem is that Stanley Black & Decker's tool business is highly cyclical and materially exposed to consumers, a group that tends to react more quickly than business customers in a business downturn. Management is working on the problems it faces, selling non-core businesses (and reducing leverage), pulling back production to get inventory levels in check, and cutting costs.
Investors should probably give the leadership team the benefit of the doubt that it can turn things around. Why? Because Stanley Black & Decker has increased its dividend annually for over five decades, making it a Dividend King. It has seen and survived hard times before while continuing to reward investors for sticking around. And, notably, the 4.3% dividend yield is historically high today, meaning investors are getting paid very well to wait out the cyclical downturn.
Investors that can take on even more uncertainty, meanwhile, might find industrial giant 3M attractive. The headwinds here, however, are a little harder to quantify. While Stanley Black & Decker just needs to get its business heading in the right direction, 3M is facing major legal and regulatory headwinds. It is fighting lawsuits around product efficacy (military earplugs) and is in the process of cleaning up environmental problems (so-called forever chemicals). There are no easy or quick fixes and headline risk is going to be high for, most likely, years.
That said, 3M is highly diversified, investment grade rated, and has an over $60 billion market cap, even after a huge stock price decline. Other big companies, like Johnson & Johnson and Altria, have faced down similar issues and survived quite well. It seems likely that 3M will do the same, even if it takes a while to muddle through the troubles.
Looking past these problems, the company's cyclical business is holding up reasonably well in the face of economic weakness. The deep stock price decline related to all the headwinds, meanwhile, has pushed the yield up to a historically high 4.9%. Backing that payment up is a streak of more than six decades of annual dividend increases (it, too, is a Dividend King). If you can stomach the headline risks, you will be paid very well to hang around.
It isn't easy to love 3M or Stanley Black & Decker today, but that's the point. They are out of favor and look historically cheap for good reasons. If that bothers you too much, don't buy them. However, if you can see that these reliable dividend payers have proven themselves over time, then you may feel comfortable enough to buy them even though they are deeply out of favor right now. And if history is any guide, that makes them very attractive, high yield, industrial turnaround opportunities.