Better High-Yield Dividend Stock: Whirlpool vs. Stanley Black & Decker

Whirlpool (WHR -0.39%) and Stanley Black & Decker (SWK 0.99%) have much in common. Both are heavily exposed to the challenging U.S. housing market and are seeing sales declines. Both are taking substantive internal action to cut costs and actively restructuring their portfolios. Both companies also aim to reduce inventory in the face of declining sales, with dividend yields of 6.3% and 3.6%, respectively. These are attractive stocks for income-seeking investors. But which is the better buy? Here's the lowdown.

Both stocks are only for housing market bulls

It's worth noting that both these stocks contain significant near-term risks. They are both plays on a recovery in the U.S. housing market, more than likely predicated on a decline in interest rates later in the year. However, the timing and magnitude of interest rate cuts are far from certain, and both companies could come under further pressure in the near term.

Image source: Getty Images.

Suppose you are highly confident in a recovery in the housing market sooner rather than later, and you can tolerate some near-term risk. In that case, nothing stops you from buying both stocks. That way, you can diversify some stock-specific risk.

The case for buying Whirlpool stock

The deteriorating sales environment forced Whirlpool to pull forward promotional activity to clear inventory in 2023. As such, Whirlpool's margin performance was lower than previously expected last year. In addition, its guidance for 2024 could be described as mediocre at best. I've included Stanley Black & Decker's guidance for ease of reference and reiterating the current challenging conditions in the U.S. housing market.

Data source: Company presentations. EBIT is earnings before interest and taxation. EBITDA is earnings before interest, taxation, depreciation, and amortization.

However, Whirlpool isn't standing still, and after cost cuts of $800 million in 2023, management is aiming for another $300 million to $400 million in 2024.

Meanwhile, management plans to focus the business on its key profit generator, the North American market, as it plans to combine its European business with a subsidiary of Turkey's Arcelik into a new company, of which Whirlpool will retain a 25% stake. The deal has recently been provisionally approved by the U.K. government and is set to go ahead in April.

Management also plans for $500 million to $650 million in free cash flow (FCF), which will easily cover the dividend payout of $400 million, and the company's cash position is strong enough that management plans to reduce debt by $500 million.

Why you should buy Stanley Black & Decker stock

It's a similar story at the tool maker. After the lockdown-inspired boom, the company faces a natural correction in demand alongside a declining DIY and professional tool market.

Management's plan involves $2 billion of cost cuts by the end of 2025 and significant inventory reduction. I covered the broad details of Stanley Black & Decker's plan earlier. As you see above, management's guidance for 2024 is mediocre on the revenue front, but Stanley's margins got hit so badly in the slowdown in 2022 that they are now in recovery mode.

Alongside the cost cuts, management is planning to continue reducing inventory. The company has reduced inventory by a whopping $1.9 billion since the plan was launched in 2022, with a $1.1 billion reduction in 2023. An inventory reduction of $400 million to $500 million is planned for 2024, helping the company to generate $600 million to $800 million in FCF, more than enough to cover the current dividend payout of some $480 million.

Which stock is better?

On balance, I think Whirlpool is better. I have three reasons why. First, Whirlpool's valuation is more attractive; it trades on less than 8 times estimated 2024 earnings and 7.2 times estimated 2025 earnings, compared to 21 times and 15 times for Stanley Black & Decker.

Second, its exit from the low-margin European market will potentially have more effect on margins over the long term than Stanley's more substantial cost cuts.

Third, the chart below shows the average number of days each company holds inventory before selling it (DIO) -- a lower number is better.

WHR Days Inventory Outstanding (Quarterly) data by YCharts

The chart shows Whirlpool is doing a much better job, and its DIO compares well historically.

All told, Whirlpool's upside potential looks greater. Its downside risk looks less because if both companies' sales collapse, Whirlpool will find it easier to reduce inventory. At the same time, Stanley Black & Decker could struggle.