Stanley Black & Decker's (SWK 2.13%) current adjusted earnings guidance for 2022 suggests a year-over-year profit decline of as much as 50%. That's terrible and helps explain why the reliable dividend payer's stock has fallen by nearly 60% over the past year. Here's why contrarian investors should see this as an attractive opportunity.
1. A historically high yield
There are many ways to value a company, but one often overlooked option is to examine a stock's dividend yield relative to historic trends. Dividends tend to be fairly stable over time, so in some ways it is a more consistent valuation tool than earnings, which can be highly variable from year to year.
In this case, Stanley Black & Decker's yield is roughly 4%. That's the highest level since the 2007 to 2009 financial crisis, which is often called the Great Recession.
SWK Dividend Yield data by YCharts
Put simply, the stock looks very cheap today. That should interest both value investors and dividend investors trying to get into a reliable income stock on the cheap.
2. An incredible history
This industrial toolmaker has increased its dividend annually for more than five decades. That puts it into the Dividend King category, a rarefied group of companies that have increased their dividend through bear markets, recessions, and periods of high inflation.
Clearly, Stanley Black & Decker places a high importance on returning value to shareholders via regular and growing dividends. To end this streak because of a temporary issue would be a massive change for the board of directors. And so far there's no indication that this is even being considered.
SWK Dividend data by YCharts
3. Just hiked
Dividends are often viewed as a signaling mechanism for a company. A dividend increase shows that management (and the board) are confident enough in the company's future to increase the amount of money going out the door.
There's a saying on Wall Street that the safest dividend is the one that's just been increased. That's an overstatement of fact, but directionally it seems pretty accurate.
On that score, despite Stanley Black & Decker's weak earnings, the quarterly dividend was increased in the middle of 2022. It was a token change of just a penny a share (or four cents a year), but the statement being made shouldn't be overlooked.
SWK Dividend data by YCharts
4. The worst of it
As far as 2022 is concerned, the pain started early on. So the midyear dividend increase was made even though the company was well aware of the problems it was facing. Essentially, the dividend was increased despite the near-term headwinds. One of the biggest issues right now is leverage, which has increased dramatically over the past couple of years.
SWK Financial Debt to Equity (Quarterly) data by YCharts
There are two things to consider here, though. First, the debt-to-equity ratio is currently around 0.65 times. That's high for Stanley Black & Decker, but it is hardly outlandish. And, second, the company saw its leverage spike like this before around the time of the Great Recession. The dividend survived that difficult period.
5. Coming back down
One of the issues on the leverage front was a debt-funded acquisition. But management has been working on it, selling non-core assets and using the proceeds to pay down debt.
Debt was reduced by $3.3 billion in the third quarter alone. In fact, long-term debt appears to have peaked in the second quarter. In other words, management is actually doing something about this, and the balance sheet improvement is clearly visible.
SWK Total Long Term Debt (Quarterly) data by YCharts
Give it some time
All of that said, there's no easy fix for Stanley Black & Decker's current woes, but it does appear that management knows what's going on, is doing something to resolve the problem (including a multiyear cost-cutting effort) and has a proven history of supporting dividends through tough periods like this.
On the earnings front, there's likely to be some more pain as the company works to adjust inventory levels, which will result in continued margin pressure over the near term. And any economic weakness won't help matters, given the cyclical nature of the company's business.
You need to think long term if you step in to buy Stanley Black & Decker. A bit of a contrarian streak wouldn't hurt, either. But with a historically high yield, the balance sheet starting to show signs of improvement, and management clearly articulating the steps it's taking to get the business back on track, Stanley Black & Decker looks like a no-brainer dividend stock for investors with stronger-than-average stomachs.
