1 High Dividend Stock Worth Buying?

Stanley Black & Decker (NYSE:SWK) is one of America’s leading tool and equipment manufacturers. It’s also among the leading dividend stocks, having kicked off regular distributions to shareholders for over half a century.

The company, however, has been struggling recently. In four of the last five quarters, Stanley Black & Decker has reported net losses, calling into question how well the company will perform going forward.

Is the SWK dividend worth it, or is this legacy tool stock finally nearing the end of its run?

Just How Much Does SWK Pay?

Stanley Black & Decker pays a handsome dividend of 3.6% or $3.24 annually. Considering that the S&P 500 pays averages just 1.4%, this means that SWK shareholders are getting over 250% of the income generated by America’s leading stock index.

Another impressive aspect of Stanley Black & Decker’s dividend is the fact that the company has raised its annual payout in each of the last 57 years. This places SWK as one of the dividend kings, a group of just 54 American companies that have raised their dividends for 50 or more years.

Although past results don’t guarantee anything about the future, this track record makes it unlikely that management will break their streak unless it becomes absolutely necessary.

Stanley Black & Decker’s Payout Ratio Is High

On paper, SWK shares appear to be a solid income investment. While bond yields are high right now, the stock’s dividend is substantially higher than the average of what investors have been able to get on cash, bonds or broad indices over the last decade or so.

The problem, though, is the stock’s payout ratio, which is currently 155.8%. Even for mature companies with limited ability to invest in further growth, the payout ratio range seen as safe usually caps out at about 75%.

Unless the company is able to raise earnings in the coming years, therefore, Stanley Black & Decker’s dividend is in danger of being cut.

With that said, the company is likely maintain its dividend for some time by drawing on its cash reserves. As of the end of Q4, the company held $23.7 billion in cash and equivalents, down a little over 5% from a year earlier.

This reserve gives the company a long runway on which to improve its performance. For the full year of 2023, Stanley Black & Decker reported spending $482.6 million on cash dividends. As such, there is little reason to believe that the company’s dividend would drop in the near future.

A further piece of evidence that the payout ratio is less concerning to management than it may appear on the surface is the fact that the company actively raised its dividend in Q3. While the increase was a modest $0.01 increase over the previous level, the move was a clear signal that management still expects to be able to keep SWK among the dividend kings.

Can SWK Regain Profitability To Protect Its Dividend?

The good news for SWK shareholders is that management doesn’t expect its losing streak to continue for long.

A combination of higher professional demand and cost-cutting measures implemented over the last year are expected to yield between $1.60 and $2.85 in earnings per share in 2024.

Though still not enough to cover the dividend, this is a huge improvement from the trailing 12-month loss of $2.08 per share.

Another factor that has the potential to reignite earnings growth is a resurgence of consumer demand. Even though the company expects to return to the black in 2024, sales of tools and outdoor equipment for DIY purposes are forecast to remain weak.

This is far from unexpected given that a similar dynamic is currently playing out across the home improvement market. Homeowners took on expansive projects during the 2020-21 era but today are spending less on renovation and remodeling.

This dip in demand, however, is unlikely to last too long. While many homeowners finished their planned projects during lockdowns, renovations will likely return to a stable and predictable level over time. As this happens, demand for tools, including those made by Stanley Black & Decker, is likely to improve.

Is SWK Fairly Valued?

Even for dividend investors, it’s also important to consider the future price range a is likely to trade in before buying it.

The current median target price for Stanley Black & Decker is $96.05, indicating a 5.75% upside against the last trading price of $90.85. Adding in the effect of the dividend, shareholders would see a total return of over 9% in the coming year if the stock advances that far.

Another telltale sign that the stock is modestly undervalued may be found in its price-to-sales ratio, which is currently 0.86.

While SWK has never been priced like a high-growth stock, shares have fairly consistently been priced between 1.0 and 1.75x sales over the last 15 years. As such, the low multiple to sales could indicate that the stock is slightly undervalued by historical averages.

Is Stanley Black & Decker Dividend Safe?

Stanley Black & Decker’s payout ratio of 155.8% puts its high dividend yield in jeopardy of being cut if earnings don’t increase soon.

Even with earnings expected to move back into positive territory this year, the dividend is precariously perched. Reduced demand for tools may be an ongoing problem for the company, and continued inflation could keep DIY consumers from investing in new ones.

Even with substantial cost-cutting measures made last year, the economic climate may need to improve before it can make a full recovery.

Despite these headwinds, Stanley Black & Decker remains a dominant company with much to offer. With an estimated 38% market share in the power tool market, the company has an undeniable moat and a long history of generating returns for investors.

Paired with a cash reserve that will likely allow it to continue making dividend payments as it regains profitability,

For most investors, SWK is likely a good stock to hold at the moment. It could, however, become an attractive buy to those who are principally focused on income.

In conjunction with other high-yield stocks, Stanley Black & Decker could be a good source of income in a dividend portfolio. As long as the company can gradually regain its earning power over the coming years, there seems to be no immediate threat to the payouts.

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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.