Stanley Black & Decker (SWK) has paid dividends for 140 consecutive years and increased its payout for the past 49 consecutive years.

Next year, Stanley Black & Decker will join the exclusive dividend kings list, which consists of companies that have raised their dividend for at least 50 straight years.

These businesses are rare and typically possess numerous competitive advantages. Stanley Black & Decker is no exception.

Let’s take a closer look at this impressive industrial business that offers dividend growth investors the potential for double-digit payout growth for many years to come.

Business Overview

Stanley Black & Decker was founded in 1843 and has grown into a diversified global provider of power and hand tools, products and services for various industrial applications, and security systems.

The company sells over 500,000 products including power drills, saws, toolboxes, wrenches, fasteners, measuring tools, compressors, nail guns, outdoor power equipment, sanders, lamps, mowers, vacuums, workbenches, polishers, grinders, cordless tools, air tools, and more.

Some of the company’s biggest brands are Stanley, DeWalt, Black+Decker, Porter Cable, Bostitch and the newly acquired Irwin, Lenox and Craftsman brands.

Stanley Black & Decker’s largest end markets by 2016 revenue are residential / repair / DIY (23%), new residential construction (18%), non-residential construction (18%), industrial / electronics (13%), automotive production (8%), and retail (4%).

By segment, Stanley Black & Decker generated 66% of its 2016 revenue from Tools & Storage, 18% from Security, and 16% from Industrial.

By geography, Stanley Black & Decker generated 52% of its 2016 revenue from the U.S., 23% from Europe, 16% from emerging markets, and 9% from the rest of the world.

Business Analysis

Stanley Black & Decker’s primary competitive advantages are its well-known brands, product innovation, global distribution channels and a strong management team.

Stanley Black & Decker’s brands and reputation for quality were established a long time ago. The company obtained the world’s first patent for a portable power tool in 1916 and has since amassed an unparalleled family of brands, products, and industry expertise.

Before going further, it’s worth mentioning that Stanley Works acquired Black & Decker in early 2010 to create the biggest toolmaker in the U.S. This deal combined the leader in consumer and industrial hand tools and security with the leader in power tools.

Today, Stanley Black & Decker has over 13,000 active global patents and introduces about 1,000 new tool products per year, including many of the “world’s first” each year. The company has noted that new products drive over 85% of its organic growth, and NPD Data recognized the company for receiving the 8^th most patents in the world from 2010-2014.

In October 2016, the company made its biggest global product launch in its 170+ year history. The Dewalt Flexvolt battery system delivered over $100 million of revenue in its first four months on the market, underscoring the company’s success at launching new products.

Innovation is a clear driver for the business, and Stanley Black & Decker is able to leverage its brand equity into adjacent product categories for easy expansion. Most of its markets are extremely large and fragmented because they require so many different types of products (e.g. a home remodeling project could require saws, measuring tools, nail guns, vacuums, tools, drills, and more).

Stanley Black & Decker can develop or acquire new products where it has gaps and market them under its famous brands. The company invested over $6 billion in acquisitions since 2002 to advance its growth opportunities, and I expect more of the same to continue over the next decade as it continues consolidating its markets.

However, during 2013, Stanley Black & Decker placed a moratorium on acquisitions to focus on near-term priorities of operational improvement and deleveraging. The company succeeded in improving its operating model and organizational capacity as well as driving organic growth and profitability during this time.

Today, the company is back to being focused on growth, with acquisitions expected to consume about half of incremental cash flow and contribute $6 billion to $8 billion in incremental revenue, helping the firm get closer to its objective of roughly doubling in size over the next six years.

Source: Stanley Black & Decker Investor Presentation

In October 2016, Stanley Black & Decker signed a definitive agreement to purchase the Newell Tools business, including its Irwin and Lenox brands, for $1.95 billion in cash. This was followed by the purchase of Craftsman brand from Sears Holdings in January 2017.

These two companies will add around $2 billion to the firm’s total revenue and are expected to be accretive to the company’s earnings while positioning Stanley Black & Decker to gain additional market share with an even broader product portfolio.

Stanley Black & Decker’s extensive distribution channels and shelf space are also major competitive advantages. Its products are in practically every home center and mass merchandise retailer because they have loyal customers, cover the broadest number of applications, and are proven to sell.

As a result, Stanley Black & Decker has number one global market share positions across tools and storage and is number two in commercial electronic security services. With leading market share positions, Stanley Black & Decker’s scale also helps it manufacture products at competitive costs (although the company typically focuses on the higher end of the market where there is less price competition).

In the company’s Security (18% of sales) and Industrial (16%) segments, Stanley Black & Decker’s business benefits from a partial recurring revenue model.

It is tied to several large automotive companies that have selected Stanley Black & Decker’s highly engineered fasteners for their models, for example, and around 40% of the Security segment’s revenue is recurring in the form of software and monitoring services.

The company’s Stanley Fulfillment System (SFS) was quite successful in enhancing Stanley Black & Decker’s operating discipline. SFS has five primary elements that work together: breakthrough innovation, digital excellence, commercial excellence, core SFS and functional transformation. Stanley Black & Decker develops business processes and systems to reduce costs and improve the company’s return on capital. 

Through SFS 2.0 (the next generation of SFS), the company has achieved even more success by further driving growth, cost efficiency, digital transformation, improved working capital performance, and the successful global launch of Flexvolt.

As an example, Stanley Black & Decker achieved a significant milestone at the end of 2016, recording 10.6 working capital turns for the first time in its history, a goal it had established almost a decade ago.

Its free cash flow conversion rate stood at 118% of net income as well, which helps ensure that there is plenty of cash that can be used for acquisitions or returned to shareholders through buybacks and dividend increases.

Over the long term, Stanley Black & Decker targets 4-6% organic sales growth and 10-12% total revenue growth. With continued margin expansion and operating leverage, Stanley Black & Decker expects earnings to grow by 10-12% per year.

Key Risks

With strong brands and a well-diversified portfolio of products in slow-changing markets, it’s no surprise that Stanley Black & Decker has successfully been in business for more than 175 years.

In my opinion, most of the risks faced by the company are short-term in nature and related to currency fluctuations and macroeconomic trends.

Construction and remodeling projects are two major business drivers which tend to move in cycles, for example. In the U.S., existing home sales hit a 10-year high earlier this year, which suggests some of Stanley Black & Decker’s business has been benefiting from unusually strong economic tailwinds. Should the housing market unexpectedly roll over, there could be a buying opportunity for long-term investors.

Stanley Black & Decker’s earnings could be negatively impacted in a challenging macroeconomic and geopolitical environment as well. For example, the company faced significant foreign exchange headwinds in 2016 with the U.S. dollar appreciating against almost all major currencies around the world.

However, I don’t see any secular themes playing out that would necessarily challenge long-term demand for Stanley Black & Decker’s product offerings. If anything, the company’s capital allocation decisions are possibly its greatest risk.

After taking several years off from major M&A to fix an underperforming security business, improve operational efficiency, and deleverage, Stanley Black & Decker has resumed its highliy acquisitive strategy, earmarking half of its cash for deals.

If management makes an untimely deal, takes on too much debt, buys a bad company, or unfavorably alters the company’s business strategy, the stock could suffer.

For example, Stanley Black & Decker acquired European security company Niscayah in 2011. The business started losing customers throughout the integration process and forced Stanley Black & Decker to later miss earnings guidance.

But the company has more often than not been quite successful in integrating the various businesses it has acquired over the years.

Otherwise, Stanley Black & Decker’s continued branding and product innovation investments seem likely to continue serving it well across its large and fragmented markets.

It’s also worth monitoring that customers could begin switching to lower-priced products, especially in emerging markets, but brand loyalty seems to be pretty high across most of Stanley Black & Decker’s product categories.

Stanley Black & Decker’s Dividend Safety

We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend.

Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at some of the most important financial factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.

Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.

Source: Simply Safe Dividends

Stanley Black & Decker’s Dividend Safety Score of 89 indicates that the company’s payout is very safe. With such an impressive streak of paying dividends, this should not come as a surprise.

Over the last four quarters, Stanley Black & Decker’s dividend has consumed 30% of its earnings and 31% of its free cash flow. Looking further back, the company’s payout ratios have generally remained between 30-40% over the last decade, which is in line with management’s 30% to 35% target.

This is a relatively low payout ratio that provides plenty of dividend safety. Even if Stanley Black & Decker’s cash flow was unexpectedly cut in half, it would still be more than enough to cover the dividend.

Observing a company’s performance during the last recession is also helpful when it comes to evaluating the safety of a dividend.

We can see that Stanley Black & Decker’s sales fell by 17% in 2009, and its earnings were down nearly 30%. The company clearly has some sensitivity to the broader economy, which isn’t too surprising given its exposure to construction markets.

However, given healthy construction markets in the U.S. and a relatively stable Europe, overall sales growth has started to improve.

Stanley Black & Decker’s economic sensitivity isn’t as big of a risk to the dividend payment because the company’s payout ratios are relatively low and it has been a free cash flow machine over the last decade.

As seen below, Stanley Black & Decker has generated positive and stable free cash flow each of the last 10 fiscal years, the sign of a very healthy business.

The business also generates a decent return on invested capital, which helps gauge the profitability and efficiency of a business. Companies with competitive advantages will generally earn returns in excess of 10%.

Prior to the financial crisis and its acquisition of Black+Decker in 2010, which brought down Stanley Black & Decker’s return on invested capital because it added substantial goodwill to the balance sheet, Stanley Black & Decker earned double-digit returns.

With continued productivity improvements, Stanley Black & Decker will likely be back to double-digit returns on capital soon enough.

Really the only strike against the safety of Stanley Black & Decker’s dividend is the company’s balance sheet. While Stanley Black & Decker does have an “A” credit rating from S&P, it has about $3.8 billion in debt compared to $540 million in cash on hand (sufficient to cover the amount of dividends it paid last fiscal year).

However, the company’s track record of cash generation has been excellent. Even after three recent acquisitions, the company has maintained a decent cash balance. Its continued focus on operational execution and the SFS 2.0 program have also contributed towards strong free cash flow generation.

Stanley Black & Decker’s relatively low payout ratios, consistent free cash flow generation, and firm commitment to paying its dividend make it one of the safest payments available in the market. While I wouldn’t mind seeing some deleveraging, Stanley Black & Decker is still very healthy financially.

Stanley Black & Decker’s Dividend Growth

Our Dividend Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

Stanley Black & Decker’s Dividend Growth Score of 81 is above average and suggests that the company should be able to deliver solid dividend growth for many years to come.

With 49 straight years of dividend increases and dividend aristocrat status, this probably comes as no surprise.

Dividend growth has consistently averaged around 5% annually in recent years, but Stanley Black & Decker’s 30% payout ratio, plans for strong growth over the next decade, and solid free cash flow generation provide plenty of room for continued increases.

Since the company has a target payout ratio of 30% to 35%, which is roughly where the ratio stands today, future dividend growth will likely track growth in earnings and free cash flow.

If management hits their growth target, SWK’s dividend could reasonably grow at a high single-digit to low double-digit annual rate in the years had. The company most recently hiked its payout by 9%, which is about in line with this expectation.

Valuation

SWK trades at about 19.8x forward earnings, a premium to the market’s 17.8 forward P/E ratio, and has a dividend yield of 1.8%, which is slightly lower than its five-year average dividend yield of 2.2%.

Management believes Stanley Black & Decker’s earnings can grow at an ambitious rate of 10% to 12% per year over the long-term, which is one reason why the stock commands a premium valuation multiple.

I think at least an upper single-digit annual earnings growth rate is reasonable to expect over the long term considering the size of the company’s markets, its many opportunities to leverage its brands and distribution channels, and management’s acquisitive growth plans.

In fact, Stanley Black & Decker has a target to become a diversified industrial giant with $22 billion in revenue by 2022 from $11.4 billion now.

Under this scenario, the stock’s valuation, while certainly not a bargain, looks more reasonable and appears to offer high single to low double-digit annual total return potential (1.8% dividend yield plus 8% to 10% annual earnings growth), likely continuing its impressive track record of outperforming most of its peers.

Source: Stanley Black & Decker Investor Presentation

Conclusion

Stanley Black & Decker has one of the best dividend track records an income investor will find. Few companies have existed for 175 years, much less paid a dividend for 140 consecutive years.

With continued product innovation and brand investment, Stanley Black & Decker’s products seem likely to be in demand for many years to come.

The company will face its ups and downs depending on currency exchange rates and macro trends in key markets such as construction, but its profits will likely continue marching higher over long periods of time.

While management’s rather aggressive acquisition plans pose some risks over the next five years, the company has earned the benefit of the doubt. Given its long-term prospects, Stanley Black & Decker appears to be a reasonable holding in a diversified dividend growth portfolio.