Stanley Black & Decker (SWK 0.99%) just made a statement: It raised its quarterly dividend by $0.01 per share. That's bigger news than it sounds, because 2023 is set to be a very bad year on the earnings front, and even worse than the difficult year the company experienced in 2022.
The investor takeaway is that management is confident in its turnaround plan. Here's why it's worth taking a risk on that plan's success.
The dividend streak is a highlight
First and foremost, Stanley Black & Decker is a Dividend King, having increased its dividend annually for well over five decades. That shows that the board places a high value on returning cash to shareholders via a growing dividend. But the real story here is that you can't string together a record like that without producing consistent business success over time.
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Not every year will be good -- Stanley Black & Decker operates in the cyclical industrial space. But the company clearly has a solid business model that has performed well over the long term. The tools it makes under a collection of iconic brands are basically necessity items if you hope to build a house or do any handiwork.
The downturn this time around, however, has been pretty tough. There was a spike in demand during the early days of the coronavirus pandemic. When that demand cooled off, inflation started to rage, causing a double whammy to the company's margins. To be fair, some of the pain was self-inflicted via a string of debt-funded acquisitions. Financial results have been ugly. In 2021 Stanley Black & Decker's adjusted earnings hit a record of $10.48 per share. But that fell to just $4.62 per share in 2022 as the company's troubles mounted, and they're expected to decline again to between $0.70 and $1.30 per share in 2023.
Business is starting to improve
What's interesting here, however, is that the earnings guidance for 2023 provided at the end of the second quarter was actually an improvement from the guidance provided at the start of the year. At that point adjusted earnings were pegged to fall between zero and $2 per share. Yes, the top end came down with the recent update, but the low end went up. This suggests that the worst-case scenario management had foreseen did not transpire. So what has management been doing to get back on track?
For starters, it has been selling non-core assets and using the proceeds to pay down acquisition debt. It has also been working to better integrate the businesses it has acquired. That has included culling its product offerings, with the specific goal of reducing redundant products. For example, there's no need to sell the same tape measure under three or four brands. That helps to reduce production costs and shouldn't hurt sales materially.
And while all of that is going on, management is reducing inventories built up during the pandemic. At that point supply chains were difficult to navigate, requiring extra inventory to ensure product availability for customers. That's not the case anymore. Reducing inventory levels hurts near-term margins since it requires lower current production levels, but it should set the company up for greater long-term success.
Speaking about production, Stanley Black & Decker is also closing manufacturing facilities. The goal is to do more with less, increasing productivity in the facilities it continues to operate. Innovation remains a core focus as well, with a plan to keep pushing hard in the cordless tool space. Such products usually come with higher margins because they command premium prices. Notably, the company's adjusted gross margin has now improved for two consecutive quarters.
During the second-quarter 2023 earnings call, meanwhile, management reiterated its belief that 2024 adjusted earnings should bounce back to at least $4 per share. If the company can live up to that, and it is already showing that the business is on the mend, investors are likely to take a much brighter view of the stock.
The price is down, but not out
And that brings up the big opportunity for investors that can handle buying into a turnaround situation. Stanley Black & Decker's stock is still over 50% below its 2021 peak. The yield is a historically high 3.3%. For income-oriented investors, this reliable dividend stock looks like it is cheap right now. There are headwinds to understand, but they appear to be receding, and that could make this industrial stock a worthwhile risk for more aggressive investors.
