Dividend Aristocrats In Focus Part 28: Stanley Black & Decker

Summary

• Stanley Black & Decker has paid increasing dividends for 50 consecutive years.
• The company has a strong and durable competitive advantage in its industry.
• But is the valuation reasonable?

By Bob Ciura

Investors looking for dividend income and sustainable growth should start with the Dividend Aristocrats.

There are 51 Dividend Aristocrats, which have raised their dividends for 25+ consecutive years. You can see all 51 Dividend Aristocrats here.

Every year, we review each of the Dividend Aristocrats. This time, diversified industrial Stanley Black & Decker (NYSE:SWK) steps up to the plate.

Stanley Black & Decker has an amazing track record of dividend growth. In 2017, Stanley Black & Decker increased its dividend for the 50^th year in a row.

In doing so, it joined the ranks of an even more exclusive club than the Dividend Aristocrats. Stanley Black & Decker is now a member of the Dividend Kings, a group of just 22 companies with 50+ consecutive years of dividend increases. You can see all 23 Dividend Kings here.

Put simply, the Dividend Kings are the best of the best. This article will discuss the qualities that have made Stanley Black & Decker a Dividend King.

Business Overview

Stanley Black & Decker has a market capitalization of $24.7 billion, and annual sales of more than $11 billion. It operates three business segments, which are Tools & Storage, Security, and Industrial products.

Source: 5^th Annual Morgan Stanley Laguna Conference, page 4

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 174 years, Stanley Black & Decker has steadily grown into one of the world’s largest industrial products manufacturers. Revenue growth has accelerated over the past 16 years.

Source: 5^th Annual Morgan Stanley Laguna Conference, page 3

Today, its main products include hand tools, power tools, and related accessories. It also produces electronic security solutions, healthcare solutions, engineered fastening systems, and more.

Growth Prospects

Stanley Black & Decker’s growth prospects are promising. The company is off to a good start in 2017. Net sales increased 10% over the first three quarters of the year.

Tools & storage segment revenue increased 16% in that time, along with 6% growth in industrial product revenue. This has more than offset a 9% decline in security product revenue.

Source: Q3 Earnings Presentation, page 5

Going forward, recent acquisitions will add to the company’s future growth. For example, on March 10^th, 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 are expected to be immediately accretive to the company’s bottom line.

Source: 5^th Annual Morgan Stanley Laguna Conference, page 6

The Newell Tools transaction is expected to add approximately $0.24 to 2017 earnings-per-share. The Craftsman acquisition is expected to lift full-year earnings by approximately $0.08 per share.

For 2017, Stanley Black & Decker expects 6% organic revenue growth. Additional growth from acquisitions, as well as acquisition-related cost synergies, are expected to drive adjusted earnings-per-share growth of 13%-14% for the full year.

Looking longer-term, management has a plan to continue growing into the next decade.

By 2022, Stanley Black & Decker expects revenue to nearly double from 2016, to $22 billion. Revenue growth is expected at 12% per year, driven by a mix of organic growth, and growth from acquisitions.

Source: 5^th Annual Morgan Stanley Laguna Conference, page 6

The company plans to invest more heavily in its Industrial segment, which is on track to generate 25% of total revenue by 2022.

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. Its brand strength gives the company pricing power, which leads to high profit margins.

And, 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. The company’s research & development expense is as follows:

• 2014 research-and-development expense of $174.6 million
• 2015 research-and-development expense of $188 million
• 2016 research-and-development expense of $204.4 million

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

Stanley Black & Decker has a trailing price-to-earnings ratio of 20.7. This is well above the historical average the stock has held since 2001. Since then, Stanley Black & Decker has had an average price-to-earnings ratio of 15.1, according to ValueLine.

Source: Value Line

Stanley Black & Decker stock appears to be overvalued, with little room for further expansion of the price-to-earnings ratio.

Going forward, returns will be comprised of earnings growth and dividends. In the past 10 years, Stanley Black & Decker increased earnings-per-share by 5% compounded annually.

The company has accelerated its earnings growth rate in recent years. A reasonable base for future growth expectations could be the middle ground, between its historical growth and projected growth going forward.

A potential breakdown of future returns could be as follows:

• 2%-4% organic revenue growth
• 2%-3% revenue growth through acquisitions
• 2% margin expansion and share repurchases
• ~1.5% dividend yield

Based on this, total returns would reach approximately 7.5%-10.5% per year, consisting of earnings growth and dividends. These total returns are before any changes in the valuation multiple. Valuation multiple changes are likely to be a drag on overall performance.

Final Thoughts

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. Unfortunately, Stanley Black & Decker appears overvalued. However, it is very likely Stanley Black & Decker will continue to hike its dividend each year for the foreseeable future.

Stanley Black & Decker is the gold standard for dividend growth. But the stock isn’t cheap right now. Our service Undervalued Aristocrats provides actionable buy and sell recommendations on some of the most undervalued dividend growth stocks around. Click here to learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.