The stock prices of these two industrial stalwarts are both down almost 30% over the last year. That's not the only thing 3M (MMM 0.51%) and Stanley Black & Decker (SWK 1.13%) have in common, though. Both offer tempting dividend yields (6.2% and 4.1%, respectively), and both have restructuring plans in place to improve operational performance. But which is the better buy?
3M's problems
The industrial giant has seen no end of troubles in recent years. Many investors focus on the potential legal liabilities coming from the company's production of possibly harmful per- and poly fluoroalkyl substances (PFAS) -- 3M will exit PFAS production by the end of 2025 -- and allegedly defective combat arms earplugs.
That's fair enough, but there's also the issue of 3M's disappointing operational performance over the last decade. Mediocre revenue growth, margin deterioration, and management that misses its own guidance are not a recipe for adding shareholder value, and the company has attracted sharp criticism from one of its biggest shareholders.
Data by YCharts
3M's restructuring plan
Fast forward to the recent results, and management unveiled a restructuring plan intended to turn its fortunes around, involving 6,000 layoffs, streamlining its corporate structure and supply chain structure, and modifying its marketing model across the globe.
However, there are a few problems. First, just a few weeks after promoting him to group president and chief business and country officer, 3M dismissed 30-year company veteran Mike Vale. Given that the three heads of the ongoing business groups (the fourth, healthcare, will be spun off in 2023) were reporting to Vale, and he reported to CEO Mike Roman, it's fair to say Vale was one of the key people in the restructuring plan.
Second, the PFAS and combat arms earplugs issues haven't gone away and continue to hang over the company even as the pressure to sustain its dividend is building.
Third, and perhaps most concerning of all, 3M's operational problems may require a more fundamental shift in strategy. Traditionally, 3M has relied on its research and development facility to develop high-quality, novel, and differentiated products that generate volume growth to enable margin expansion through ramping production. With that model coming under question, 3M might need to undergo a more fundamental restructuring. One possible option is to move toward a model more like Illinois Tool Works' and its continuous processes of refining pre-existing products and its product lines for its key customers.
Stanley Black & Decker's tough year
The tools maker enjoyed some bumper growth during the lockdown periods as homeowners focused spending on DIY and garden products. While it's understandable that management took advantage of the situation, it may have led them to avoid making long overdue restructuring actions over their long and complex supply chains.
Data by YCharts
Unfortunately, Stanley Black & Decker got hit with a double whammy in 2022. In fact, it's better described as a triple whammy. First, soaring raw material costs and supply chain issues pressured its costs. Second, end demand turned down in response to higher interest rates cooling the housing market and a natural correction from the elevated levels of demand due to the lockdowns. Third, poor weather last year negatively impacted sales of outdoor products, precisely as the company was integrating its acquisition of garden equipment company MTD.
The end result was adjusted earnings per share (EPS) of $4.62 in 2022 when management had started the year forecasting $12 to $12.50.
Image source: Getty Images.
Stanley Black & Decker's restructuring plan
In response, management launched a substantive restructuring plan aimed at cutting annual costs by $2 billion by 2025, with $1 billion in 2023. Meanwhile, management sought to significantly reduce its inventory in line with falling sales -- no easy task without having to cut prices and ultimately profit margins.
The latest news on the plan is mixed. On the plus side, management said it had achieved $230 million in cost savings in the first quarter and was on track for $1 billion in 2023. Furthermore, according to CEO Don Allan on the earnings call, "Inventory reduction is also ahead of plan with incremental $200 million improvement in the quarter."
As you can see below, Stanley is finally reducing its inventory/sales ratio, even as its sales continue declining.
Data by YCharts
On the minus side, the outlook for its tools and outdoor products sales continues to deteriorate, with new base case guidance for a full-year decline of low to mid-single digits compared to an original outlook for a decline of low single digits.
Moreover, one of its major partners, Home Depot, has already downgraded its sales expectations for fiscal 2023 from "flat" compared to fiscal 2022 to a decline of 2% to 5% from fiscal 2022.
Stanley Black & Decker or 3M?
The toolmaker's end markets are deteriorating more than the industrial conglomerate's in 2023, and it's likely that Stanley is subject to more near-term risk around its full-year earnings outlook.
That said, 3M's problems look more fundamental in nature, and losing a key executive at such a pivotal time is a blow. As such, Stanley looks better if you can tolerate the potential for near-term bad news. Management is reducing inventory, and the other key to its recovery, the cost-cutting plan, is on track.
