Published November 4th, 2016 by Bob Ciura
Stanley Black & Decker (SWK) is named after its co-founders: Frederick Stanley, Duncan Black, and Alonzo Decker. Stanley Black and Decker is the result of two companies, Stanley Works and Black & Decker, combining in 2010.
All the way back in 1843, Frederick Stanley started a shop in New Britain, Connecticut, to manufacture bolts, hinges, and other hardware. His products became renowned for their high quality. Stanley continued to innovate to come up with new products and grow the business.
Black and Decker traces its roots to Duncan Black and Alonzo Decker, who started their own hardware shop in 1910. In 1916, they obtained the world’s first patent for a portable power tool.
Eventually, the two companies joined forces. Stanley Black & Decker is a Dividend Aristocrat, and has increased its dividend for 49 years in a row. Only businesses with 25+ years of consecutive dividend increases qualify to make this exclusive list. You can see all 50 Dividend Airstocrats here.
Keep reading this article to learn more about the investment prospects of Stanley Black & Decker.
Stanley Black & Decker is an industrial manufacturer of tools, storage, and security products. It has a $17 billion market cap and generated more than $11 billion of revenue last year.
It operates three businesses:
- Tools & Storage (64% of total sales)
- Security (19% of total sales)
- Industrial (17% of total sales)
Stanley Black & Decker has a significant international presence. Its products are sold in 212 countries around the world. The company collects nearly half of its revenue from outside the U.S.
Source: 2015 Annual Report, page 4
Stanley Black & Decker’s revenue rose from $2 billion in 2000, to $11 billion last year. From 2000-2015, Stanley Black and Decker stock returned more than 400% to its investors.
Last year, Stanley Black & Decker increased earnings-per-share by 5%. There is a lot of potential for earnings growth to accelerate going forward.
Stanley Black & Decker has a demonstrated track record of steady growth over time. For example, from 2006-2015 the company increased its earnings-per-share by 5.5% compounded annually.
Moving forward, Stanley Black & Decker management has set ambitious—but still attainable—goals for future growth.
Source: 2015 Annual Report, page 5
One could argue that management’s forecast is too aggressive. Projecting 10%-12% total revenue growth seems high, particularly when the company’s total revenue declined 1% last year.
However, it is important to note that the revenue decline in 2015 was entirely due to currency fluctuations. As a global company, Stanley Black & Decker is being weighed down by the strong U.S. dollar.
Unfavorable currency fluctuation wiped out 7% of revenue growth last year for Stanley Black & Decker.
Stanley Black & Decker actually generated organic revenue growth of 6% last year, which indicates demand or its products remains strong.
Stanley Black & Decker’s primary growth catalyst will be expansion in new geographic territories. It intends to accomplish this mainly through acquisitions. Management expects to dedicate 50% of future annual free cash flow for acquisitions.
Stanley Black & Decker recently acquired Newell Tools for $1.95 billion. The acquisition further expands Stanley Black & Decker’s international exposure, as 40% of Newell Tools’ revenue comes from outside North America.
Source: Newell Acquisition Presentation, page 5
Focusing on growth in emerging markets is a good long-term strategy. These are markets where economic growth exceeds that of developed markets like the U.S.
For example, last year Stanley Black & Decker generated 9% organic revenue growth in Latin America. Over the long-term, management wants to generate more than 20% of Stanley Black & Decker’s revenue from the emerging markets.
Competitive Advantages & Recession Performance
Two key competitive advantages for Stanley Black & Decker are its brand strength and global scale.
Source: 2015 Annual Report, page 10
Stanley Black & Decker has a leadership position in each of its three product categories. Its brand strength gives the company pricing power, which leads to high margins.
Last year, Stanley Black & Decker expanded operating margin in the core Tools & Storage segment by 110 basis points. The Tool & Storage business generated record operating margin last year, for the second consecutive year.
Stanley Black & Decker’s long history of paying consistent dividends each year proves it has a durable business model.
At the same time, Stanley Black & Decker did experience deteriorating fundamentals during the Great Recession. The steep recession had a clear impact on the company, as shown:
- 2007 earnings-per-share of $4.00 (EPS high)
- 2008 earnings-per-share of $3.41 (15% decline)
- 2009 earnings-per-share of $2.72 (32% decline from 2007 high)
- 2010 earnings-per-share of $3.96 (close to reclaiming 2007 high)
- 2011 earnings-per-share of $5.24 (new EPS high)
As an industrial manufacturer, Stanley Black & Decker is not immune from global recessions. But despite the 32% peak-to-trough decline in earnings-per-share during the Great Recession, the company quickly recovered. Its earnings-per-share grew to a new high in 2011.
Valuation & Expected Total Return
Stanley Black & Decker stock is valued at a price-to-earnings ratio of 17.7. It is cheaper than the S&P 500, which has a price-to-earnings ratio of 24.0.
However, the picture changes when compared with its historical valuation. Since 2000, Stanley Black & Decker’s average price-to-earnings ratio is 14. From this perspective, Stanley Black & Decker stock appears slightly overvalued.
Plus, Stanley Black & Decker has excellent growth prospects. Earnings-per-share growth could be comprised of:
- 4%-6% organic revenue growth
- 3%-4% revenue growth through acquisitions
- 2% share repurchases
This would result in 9%-12% earnings-per-share growth. In addition, Stanley Black & Decker has a 2% current dividend yield.
With this in mind, total shareholder returns could be expected to reach 11%-14% annualized going forward.
Stanley Black & Decker is a blue-chip industrial manufacturer. It has strong brands and operates a highly profitable business model.
That being said, dividend growth investors may not see this as a good buying opportunity right now. Stanley Black & Decker stock is overvalued relative to its historical valuation. And, its 2% dividend yield is slightly below the average dividend yield in the S&P 500.
As a result, dividend growth investors may want to wait for a better price before buying the stock. The company does rank not rank particularly well using The 8 Rules of Dividend Investing, but is a long-term hold.