Updated on March 23rd, 2021 by Bob Ciura
Put simply, investing in high-quality dividend growth stocks can lead to outstanding long-term returns. Investors looking for dividend income and sustainable growth should start with the Dividend Aristocrats, an exclusive group of companies that have raised their dividends for 25+ consecutive years.
With this in mind, we created a full list of all 65 Dividend Aristocrats, along with important financial metrics like dividend yields and price-to-earnings ratios.
You can download an Excel spreadsheet with the full list of Dividend Aristocrats by using the link below:
There are only 65 Dividend Aristocrats. This article will review diversified industrial manufacturer Stanley Black & Decker (SWK).
Stanley Black & Decker has an amazing track record of dividend payments. The company has paid dividends for 144 years, and has increased its dividend each year for 53 consecutive years. Today, the company’s dividend appears very safe relative to its underlying fundamentals.
It now ranks among an even more exclusive club than the Dividend Aristocrats. Stanley Black & Decker is a member of the Dividend Kings, a group of just 31 companies with 50+ consecutive years of dividend increases.
Put simply, the Dividend Aristocrats and Dividend Kings are the best of the best when it comes to dividend growth stocks. This article will discuss the qualities that have made Stanley Black & Decker a time-tested dividend growth stock.
Stanley Black & Decker is the result of Stanley Works’ $3.5 billion acquisition of Black & Decker in 2009. Stanley Works and Black & Decker were both named after their respective founders. Stanley Works was formed in 1843, when Frederick Stanley started a small shop in New Britain, Connecticut, where he manufactured bolts, hinges, and other hardware. His products developed a reputation for their quality.
Meanwhile, Black & Decker was started by Duncan Black and Alonzo Decker in 1910. Like Stanley, they opened a small hardware shop. In 1916, they obtained a patent to manufacture the world’s first portable power tool. Over the next 175 years, Stanley Black & Decker has steadily grown into one of the world’s largest industrial products manufacturers.
Source: Investor Presentation
Its main products include hand tools, power tools, and related accessories. It also produces electronic security solutions, healthcare solutions, engineered fastening systems, and more.
Revenue growth has accelerated over the past two decades. Today, Stanley Black & Decker has a market capitalization of $32 billion, which makes it a large-cap stock. The company has annual sales of more than $14 billion. It operates three business segments, which are Tools & Storage, Security, and Industrial products.
The company has produced excellent growth rates in recent years, due in large part to an aggressive acquisition strategy.
Stanley Black & Decker’s growth prospects are promising. The company maintained a strong growth rate in 2020, even as the coronavirus pandemic negatively impacted the global economy. Stanley Black & Decker reported fourth-quarter and full-year earnings results on 1/28/2021. For the fourth quarter, revenue increased 18.6% to $4.4 billion, while adjusted earnings-per-share grew 51% to $3.29.
Organic revenue growth was 16% for the quarter, compared to consensus estimates of 9.9% and company guidance of 10%. Each geographic region had at least 15% organic growth, with North America up 27% and emerging markets improving 32%. North America benefited from a strong retail market, emerging markets growth was due to strong construction demand and Europe benefited from growth in all regions.
Full-year revenues grew 1% to $14.5 billion while adjusted earnings-per-share improved 7.6% to $9.04. Free cash flow grew 55% to a company record $1.7 billion for the year. Stanley Black & Decker believes each segment will produce organic growth in 2021, with total company organic growth in a range of 4% to 8%. The company expects adjusted earnings-per-share in a range of $9.70 to $10.30 for 2021.
Acquisitions have helped shape Stanley Black & Decker’s product portfolio. For example, in 2017 Stanley Black & Decker closed on the $1.95 billion acquisition of the Tools business of Newell Brands. This acquisition strengthened the company’s foothold in tools, and added the high-quality Irwin and Lenox brands to the product portfolio.
Not only that, but in 2017 Stanley Black & Decker also acquired the legendary Craftsman brand from Sears Holdings (SHLD) for $900 million. Both deals were immediately accretive to the company’s bottom line in 2017. Smaller acquisitions have continued in the years since.
Looking longer-term, management has a plan to continue growing into the next decade. The company plans to invest more heavily in its Industrial segment, which is on track to generate 25% of total revenue by 2022. Overall, Stanley Black & Decker believes it can grow long-term organic revenue by 4%-6% per year, along with double-digit total revenue and adjusted EPS growth per year.
Competitive Advantages & Recession Performance
Stanley Black & Decker’s main competitive advantages are its brand portfolio, and global scale. Innovation and scalability are at the core of the company’s growth strategy. It has a leadership position in each of its three product categories and its brand strength gives the company pricing power, which leads to high profit margins. Furthermore, it is relatively easy for the company to scale up its brands, thanks to distribution efficiencies.
To retain these competitive advantages, Stanley Black & Decker is constantly investing in product innovation. That said, Stanley Black & Decker is not immune from recessions. Earnings declined significantly in 2008 and 2009. As an industrial manufacturer, Stanley Black & Decker is reliant on a strong economy and a financially-healthy consumer.
Stanley Black & Decker’s earnings-per-share during the Great Recession are below:
- 2007 earnings-per-share of $4.00
- 2008 earnings-per-share of $3.41 (15% decline)
- 2009 earnings-per-share of $2.72 (20% decline)
- 2010 earnings-per-share of $3.96 (46% increase)
Despite the steep decline in earnings from 2007-2009, Stanley Black & Decker recovered just as quickly. Earnings-per-share increased another 32% in 2011, and reached a new high. Earnings have continued to grow in the years since.
Valuation & Expected Returns
Using the current share price of ~$194 and expected earnings-per-share for 2021 of $10.00, Stanley Black & Decker has a price-to-earnings ratio of 19.4. This is above the ten-year average valuation of 15.7 that the stock has held since 2008.
Stanley Black & Decker stock appears to be overvalued given that its price-to-earnings ratio is higher than its historical norm, which is also our fair value estimate for the stock. If the stock’s valuation were to contract to meet its historical average by 2026, investors would experience a meaningful 4.1% headwind to annualized total returns over this period of time.
Going forward, returns will therefore likely be comprised of earnings growth and dividends offsetting valuation multiple contraction. Due to organic growth and acquisitions, we feel that an expected EPS growth rate of 8% per year is sustainable.
The stock also has a current dividend yield of 1.4%. Based on this, total returns would reach approximately 5.3% per year, consisting of earnings growth and dividends offsetting valuation multiple contraction. This is a fairly modest rate of return, meaning Stanley Black & Decker earns a hold recommendation.
Stanley Black & Decker is not a high-yield stock, but it has all of the qualities of a strong dividend growth stock. It has a top position in the industry, strong cash flow, and durable competitive advantages.
The company has a positive growth outlook, which bodes well for the dividend. The stock appears overvalued today, but at the same time it is very likely Stanley Black & Decker will continue to hike its dividend each year for the foreseeable future.
Since the stock is expected to produce mid single digit annualized total returns over the next five years, Stanley Black & Decker remains a hold for long-term dividend growth investors.