Best Dividend King to Buy Now: With the stock market selloff of 2022, a handful of dividend kings have gone deeply on sale.
This situation has created opportunities for long-term dividend investors to realize large yields and invest in historically reliable blue-chip companies at attractive prices.
One of the most promising sold-off dividend kings at the moment is Stanley Black & Decker (NYSE:SWK), which has lost nearly 60 percent of its value YTD.
But is SWK now the best dividend king to buy?
Why Stanley Black & Decker Has Sold Off
Although Stanley Black & Decker may be a good buy due to its considerable selloff this year, it’s important to note that there were real reasons behind the drop in share prices.
First and foremost among these was a decline in financial health at the toolmaker. Stanley Black & Decker has taken on much more debt than usual amid slowing consumer spending, leaving some investors concerned about the company’s long-term fiscal stability.
At the same time, the company has turned in weaker-than-average performance. While revenue rose by 9 percent in Q3, earnings were much less favorable. The EPS of $0.76 beat out the consensus estimate of $0.70, but it was also a sharp decline from Q3 2021’s $2.77 EPS.
In the Q3 report, management also downgraded the full-year GAAP EPS estimate from $0.80-2.05 to $0.10-0.80.
Is Stanley Black & Decker Undervalued?
One of the core arguments surrounding Stanley Black & Decker at the moment concerns its valuation. The company currently trades at 18.45 times forward earnings, a bit below the S&P 500 average.
The company’s price-to-sales ratio is 0.78, a relatively safe level that doesn’t typically signal overvaluation. However, Stanley Black & Decker also has a high price-to-earnings-growth ratio at 2.05.
A ratio of 2 or more typically indicates a significantly overvalued stock. As such, Stanley Black & Decker gives off mixed signals from a value perspective.
This uncertainty around the company’s future can be seen in analyst price forecasts. While the analysts target price of $81 is almost perfectly flat relative to the current price of $81.93, the range of price targets varies widely. The 16 analysts covering Stanley Black & Decker have offered price projections ranging from $69 to $113 in the coming 12 months.
It’s important to note, however, that the current valuation doesn’t reflect the strong possibility of an earnings recovery. Stanley Black & Decker has been in business since 1843 and has ridden out most of the major stock market declines in American history. Because it is dependent on consumer spending and building activity, however, the company can be quite cyclical.
Taking this into account, the value argument seems to tilt in Stanley Black & Decker’s favor. Improvements in earnings from greater consumer spending and an easing of inflationary pressures would likely make the stock look much more attractive. Even without a full recovery to its previous level of profitability, Stanley Black & Decker could be a solid value stock when the next bull market begins.
Indeed when we ran the numbers using a discounted cash flow forecast analysis, we arrived at a fair market value of $125 per share suggesting as much as 53.1% upside potential.
Stanley Black & Decker Dividend
As a dividend king, Stanley Black & Decker’s quarterly distribution is high on the list of potential reasons to buy the stock. The company has successfully increased its distribution for 54 consecutive years.
Today, the stock pays $3.20 annually per share for a yield of 3.91 percent. This dividend appears to be very safe, as Stanley Black & Decker’s payout ratio is a very conservative 35 percent.
Stanley Black & Decker has also maintained a respectable dividend growth rate. Over the last 10 years, the distribution has increased at a compounded rate of 5.86 percent annually.
Analysts forecast that the next few years could be even better for dividend appreciation, as the anticipated CAGR for the coming three years is 8.02 percent. For investors who buy at today’s prices, this would translate to a nearly 5 percent annual yield on cost within three years.
Where Does Stanley Black & Decker Go From Here?
If Stanley Black & Decker is to achieve substantial share price growth, it will need to turn its performance around. Fortunately for investors, there are multiple opportunities for it to do so on the horizon. The most obvious of these is the beginning of a new bull market that could bring improvements in consumer spending.
While a recession is likely early in 2023, a new bull market could begin by the end of next year. This would likely lift Stanley Black & Decker, among many other consumer-facing stocks.
As a major maker of small tools, Stanley Black & Decker is also in a strong position to benefit as money from last year’s infrastructure bill continues to trickle through the American economy. Infrastructure projects will likely continue for several years, and more spending could be approved by the next Congress to spur economic activity.
While there’s no doubt that Stanley Black & Decker is experiencing difficulties, the market seems to have overreacted by failing to price in a potential recovery.
Even the debt load that has scared some investors away isn’t as worrisome as one would expect. The company’s debt-to-equity ratio stands at 0.60, a level that a company as established as Stanley Black & Decker will likely have little difficulty in managing.
It’s also important to note that Stanley Black & Decker has a long history of riding out difficult times. The company has successfully increased its dividends through the 2008 financial crisis, the dot-com bubble and the inflation of the 1980s.
Given its economic moat and long history of success, it seems unlikely that today’s temporary slump in performance will be the end of this legacy blue-chip company.
Overall, Stanley Black & Decker appears to be a strong candidate for dividend growth investors. This year’s selloff has left the stock with a higher-than-average dividend yield, but there seems to be little danger of slowing dividend growth. Investors who are willing to buy and hold this stock will likely see good yields on cost and, eventually, considerable improvements in share prices.
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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.