With a 61% decrease from its peak, is it possible that this battered dividend titan stock might recover and regain its footing in 2025?
Stanley Black & Decker (SWK 0.11%) is a dominant force in the tool-making industry, boasting renowned brands such as DeWalt, Craftsman, Irwin, LENOX, Stanley, and Black & Decker. However, its stock has been facing rough times. It's currently 61.7% below its all-time high, reached in 2021, and only 20.76% above its lowest point in 10 years, which it hit on March 19, 2020, during the COVID-19 market crash.
This drop might surprise some, given that Stanley Black & Decker is a Dividend King with a 3.9% yield and 56 consecutive years of dividend increases. Dividend Kings are usually stable companies with enhanced earnings to consistently boost their payouts. But why is this titan under more pressure currently, potentially making it an attractive buy for patient investors?
Rollercoaster ride from record highs to a prolonged recovery
Stanley Black & Decker has experienced some ups and downs lately. The COVID-19 pandemic led to an increase in home improvement projects and DIY activities, which significantly boosted the company's sales. To seize the opportunity, Stanley Black & Decker borrowed heavily and made $1.9 billion in acquisitions in December 2021. As shown in the graph below, both Stanley Black & Decker's stock price and its net total long-term debt peaked around the same time, reflecting the temporary optimism of investors.
Regrettably, the surge in demand was short-lived. In hindsight, the pandemic had brought forward sales for future years instead of initiating a new normal. Saddled with excess debt and overleveraged, the company struggled when the economic cycle shifted towards downturn, causing negative cash flow. Over the past two years, Stanley Black & Decker has been implementing a cost-saving plan to rebalance its business, even selling STANLEY Infrastructure in December 2023 for $760 million to help pay off its debt.
The recovery has been relatively successful so far, as shown in the improvement of gross margins and operating cash flow. However, the company has missed its target of reaching 35% gross margins, which has negatively impacted the stock in recent months.
On its third-quarter earnings call in 2024, the company reported a 5% decrease in revenues compared to the same period in 2023, signaling weak demand. Nevertheless, the company stated that it was on track for its expected $2 billion in pre-tax run-rate cost savings by the end of 2025, currently boasting $1.4 billion in savings since implementing the program a couple of years back.
Challenges ahead for Stanley Black & Decker
Stanley Black & Decker is rebounding despite a tough business environment, yet some concerns remain about the company's ability to hit its 35% gross margin target by 2025, even with the existing cost-saving plan. During its third-quarter earnings call, the company's CEO, Donald Allan, explained that the company's path toward margin improvement would depend mainly on interest rates:
I believe that what will really impact it, perhaps as much or more than anything, is how quickly interest rates start to take effect and how rapidly the economy corrects itself. Also, how much fixed cost reduction activity will we be able to implement and complete in time for it to fall off the balance sheet next year.
Stanley Black & Decker has lost 8.2% over the last month. One of the main reasons for the continued sell-off could be investors' concerns about lower interest rates. During the previous week's Federal Reserve commentary, Chairman Jerome Powell praised the economy's strength but cautioned that inflation was slightly higher than expected. A strong economy is excellent news, but it might result in the Fed keeping interest rates higher for longer or slowing the pace of rate cuts. This would pose a challenge for rate-sensitive companies like Stanley Black & Decker.
Why it's a good buy now
Despite the challenges, Stanley Black & Decker is an appealing turnaround stock worth considering at the moment. Its yield is 3.9%, which is significantly higher than many other Dividend Kings'. While Stanley Black & Decker has made minimum one-cent-per-share per quarter dividend raises since 2021 to preserve its streak, investors should expect Dividend Kings to increase their payouts at least 5% to 10% annually (depending on the company and whether the capital return program includes buybacks). However, given the company's current situation, the focus should be on the yield rather than further dividend increases.
What sets Stanley Black & Decker apart as a buy is its anticipated timeline for recovery. The stock price hasn't made any significant progress for two years, yet the company has made substantial progress on its turnaround during that time. If it achieves its goals, its turnaround will be mostly completed in a year, but the company will still be far from its peak performance. Its forward price-to-earnings ratio is 20.4. If Stanley Black & Decker can build upon its earnings growth in 2026, the stock could appear very affordable.
In conclusion, Stanley Black & Decker looks like a dividend stock worth purchasing – but only for investors with at least a three- to five-year investment horizon, as the turnaround may take longer than anticipated.
Despite the current challenges facing Stanley Black & Decker, such as its struggle to reach the 35% gross margin target and negative impacts from interest rates, the company's strong financial position makes it an attractive investment opportunity. With a 3.9% yield and a successful cost-saving plan, Stanley Black & Decker is a Dividend King that has maintained its dividend increases for 56 consecutive years, offering a higher yield compared to many other Dividend Kings. For patient investors with a long-term perspective, Stanley Black & Decker's affordable forward price-to-earnings ratio and potential earnings growth in the future make it an appealing turnaround stock worth considering.
In light of Stanley Black & Decker's financial performance and future potential, there is an opportunity to invest in the company's strong finance and investing side, especially considering its history of dividend increases and robust financial position.
