Dividends are a way for companies to reward shareholders by paying out a portion of their profits, and smart investors are on the lookout for good dividend stocks to buy.
Stanley Black & Decker (SWK +0.47%) and Constellation Brands (STZ 2.40%) have dividend yields as I write this of around 4% and 2.3%, respectively. That's much higher than the S&P 500 index's 1.3%, so they look tantalizing.
However, merely buying a stock because of its yield can lead to poor investment decisions. And looking just at share price won't tell you whether a stock is "cheap." Between Stanley Black & Decker and Constellation Brands, which is the better buy?
Image source: Getty Images.
The comparison
Looking at a stock price in a vacuum doesn't tell you much. Shares of Stanley Black & Decker cost much less than Constellation Brands shares, but that doesn't tell you which stock is the better value.
It's important to use a common valuation metric to make a comparison. While the price-to-earnings (P/E) ratio can provide a good comparison, Stanley Black & Decker reports adjusted earnings that strip out certain items, such as sold businesses and foreign currency exchange fluctuations. That can make comparisons difficult. Constellation makes adjustments to its earnings for comparability, but those are easier to track.
Hence, price-to-sales (P/S) works better as a valuation measure since it avoids any confusion here. It uses the reported sales figure. The higher the multiple, the more expensive the stock.
Stanley Black & Decker gets most of its revenue (sales) from selling tools and outdoor products under brands like Stanley, Black+Decker, and Craftsman. Last year's revenue was $15.4 billion, flat when compared to the previous year after excluding acquisitions, divestitures, and foreign currency translations.
Dividing the roughly $12 billion market cap by $15.4 billion in sales works out to a P/S ratio of 0.8.
Constellation Brands makes and sells beer, wine, and spirits. It generated sales of $10.2 billion in the 12 months ended Nov. 30.
Using that revenue and Constellation Brands' market cap of around $32 billion, the stock has a P/S of around 3.2.
SWK Revenue (TTM) data by YCharts
Using this comparison of market cap (price) to revenue (sales), it's clear that Stanley Black & Decker sells at a much lower valuation and is the cheaper stock in this matchup. Still, while management has taken certain steps to grow the business faster, including jettisoning businesses and pushing innovation, management's plan remains a work in progress. You may decide it's worth the risk and believe this will result in faster profit growth. However, given the uncertainty, the market has discounted the shares.
