There's an old Wall Street maxim that says the best time to buy is when there's blood in the streets. That might be a bit extreme for most investors, but the point is that you can often find the best deals on stocks that other investors are afraid of.
Right now Stanley Black & Decker (SWK 1.39%) and Black Hills (BKH 2.08%) are out of favor, which is why you might want to take a closer look at these two historically cheap Dividend Kings.
1. Stanley Black & Decker is way down
A "fallen angel" is an investing term for a once-beloved stock that has faced some hardship that sent its shares hurtling back to Earth. With a stock price that's down over 55% since hitting a high in 2021, Stanley Black & Decker looks very much like it has lost its wings. There's a good reason for that: Adjusted earnings hit a record high of $10.48 per share in 2021 before promptly falling to $4.62 in 2022 and then to $1.45 in 2023.
Image source: Getty Images.
Several problems led to this outcome, including debt-funded acquisitions that left the iconic tool maker with a bloated and inefficient business. Management has been hard at work selling assets, streamlining operations, cutting costs, and paying down debt to get back on its feet. But the Dividend King also remained committed to its dividend, making modest increases to the annual payment despite the earnings decline. That commitment coupled with the deep stock-price decline has left the company with a historically attractive 3.5% dividend yield.
The best part of the story is that the industrial company's efforts to turn things around appear to be taking hold. For example, Stanley Black & Decker's margins improved over the past year. Executives are currently projecting adjusted earnings for 2024 to turn upward again, coming in between $3.50 and $4.50 per share.
Given the rough two years that Stanley Black & Decker lived through, the company has a lot to prove. But if it can get earnings going in the right direction again, Wall Street will likely reward the stock with a higher valuation. Now is the time for a deep dive if you can stomach owning a turnaround stock.
2. High rates are going to be an issue for Black Hills
Black Hills is a relatively small electric and natural gas utility that serves 1.3 million customers in parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. It isn't a very exciting business given that it is just a boring (and regulated) utility. That said, it has managed to increase its dividend annually for over five decades, so boring can be very attractive if you like consistency. Right now, Black Hills' yield is near a decade-high level at roughly 5%.
Its problem is pretty basic to the utility business model. Operating power plants and natural gas distribution systems is a capital-intensive business and companies like Black Hills generally make significant use of debt financing. Regulated operations lead to reliable cash flows, so the risk of unreasonable leverage isn't particularly high. And yet rising interest rates will lead to higher costs; there's no way around that as debt rolls over to higher rates. That's exactly what Black Hills is facing, and investors have sold the stock down along with the broader utility sector.
That said, regulators will eventually take higher interest rates into consideration when they approve capital investment projects and utility rates. So in time, Black Hills' business will adjust. Meanwhile, long-term investors have the opportunity to buy a boring and reliable Dividend King with a historically high yield. It is worth noting that customer growth in the regions that Black Hills serves is increasing at nearly three times the rate of the U.S. population. That's highly supportive of strong long-term performance and more dividend boosts.
These opportunities won't last forever
Of these two Dividend Kings, Stanley Black & Decker has the bigger near-term catalyst. If you wait too long, you might miss the opportunity to buy it while it looks historically cheap. Black Hills is probably a longer-term story, as interest rate adjustment cases take time to work through. But even here, the time to start doing your deep dive is now, while the stock remains moribund and the yield is historically high.
