The coronavirus pandemic created supply chain snarls that required material changes to business practices. Now that the world is moving on from the public health crisis, the supply chain is slowly starting to get back to normal. That's been tough on Stanley Black & Decker (SWK) and IFF (IFF 0.44%). But for dividend investors that can think long term, now could be a good time to jump on board.
1. More pain before the gain
Stanley Black & Decker is an industrial icon with over five decades of annual dividend increases behind it. That makes it a highly elite Dividend King. The company makes tools, which seem pretty mundane, but are really necessity items. Imagine trying to build a house without power tools; it can be done, but it would be a lot harder. Still, it looks like 2023 is going to be a rough year, with adjusted earnings projected to fall between breakeven and $2.00 per share. That's down from $10.48 per share in 2021.
There are a lot of moving parts here. For starters, Stanley Black & Decker made some acquisitions that left it with a heavy debt load. It has sold noncore assets and started to deleverage, though there is still more work to be done. If that were the only issue, it wouldn't be such a big deal. But the new businesses have to be integrated and, while that has been going on, a pandemic created supply chain snarls that required the company to carry extra inventory so it could service its customers. Management has a plan, but all of this hit at the same time.
Cost-cutting is underway, including plant closures and the elimination of redundant products. There are extra costs associated with this effort, including severance. Stanley Black & Decker has also been pulling back on production to work through its excess inventory, but that means less-profitable products are being sold and reduced production leads to spreading costs over fewer items. That's a hit to near-term margins, though it should clear the system out for the future. It is not pretty today, as the earnings trend shows.
But you don't get to Dividend King status without working through some hard times and management has been very clear that the dividend is a key focus. With the stock still down 60% from its 2021 high-water mark and the roughly 4% dividend yield still near historic highs, long-term investors should take a look today before Wall Street gets wise to the turnaround that's taking shape.
2. A bad taste in investors' mouths
IFF makes flavors and fragrances (the company was formerly known as International Flavors & Fragrances). These are key ingredients for everything from food to detergent. Like Stanley Black & Decker, the supply chain in which the business operates wound up having to increase inventory during the pandemic upheaval to ensure products could be reliably produced. That overhang is now being worked through and it is reducing demand for IFF's products.
On top of that, the company has made some acquisitions that have left it with a heavy debt load. It is selling assets to reduce leverage. It is also working on cost-cutting. And it has curtailed production levels to more quickly reduce its own inventories, even though that means lower profitability in the near term. In short, this industrial supplier is basically doing all of the same things that Stanley Black & Decker is, but it has a more upbeat outlook for the year. Indeed, IFF expects sales volumes to increase from here as the supply chain is mended. The year will still be a tough one, but the worst may be behind the company.
SWK Dividend Yield data by YCharts
Plus, IFF has been very clear that the dividend is going to be supported through this rough patch. So the historically high 3.6% dividend yield looks safe and the over two-decade-long streak of annual dividend increases is likely to remain intact. The stock is still down around 45% from its high-water mark, so long-term investors looking for bargain prices might want to take a close look here, too.
Warts and all
Neither Stanley Black & Decker nor IFF are a good choice for investors that can't stand a little uncertainty. But for those that think long-term and that have a contrarian bent, these longtime dividend growers will probably be of interest. The key is to keep track of their turnaround efforts, which so far appear to be progressing as expected.
