Initial Screening

Stanley Black & Decker has a rich history, spanning 178 years and multiple name changes. Founded initially in 1843 by Frederick Trent Stanley as Stanley’s Bolt Manufactory, its first name change came in 1920 upon merging with Frederick’s cousin Henry’s Stanley Rule and Level Company. Together they became The Stanley Works.

It wasn’t until nearly a century later in 2010 that the merger with Black & Decker and DeWalt tools established its current name of Stanley Black & Decker (short: SBD). This merger resulted in the creation of a global leader in construction and industrial tools with operations focused on the United States, but also with a reach spanning across the globe.

With 71% of revenue driven from the Tools and Storage vertical, SBD’s peer group and main competition consist domestically of Snap-on Incorporated (SNA), Illinois Tools Works (ITW), and Toro Company (TTC). The stock is traded under the ticker symbol SWK on the New York Stock Exchange and all financial figures quoted throughout this article will be referenced in USD.

Business Model

Stanley Black & Decker’s business model can be broken down into 3 major segments: Tools & Storage, Industrial, and Security. Each of the segments includes their own strong and established brands, but we will take a closer look at each in the following text.

Tools & Storage account for the majority (71%) of the revenue of Stanley Black & Decker. As the global leader for tools and storage, SBD is well positioned offering strong brands for different market and consumer subsegments. Shown below is a graphic outlining SBD’s brands with their relative price point (opening, medium, high) and their target market.

The Industrial segment contributes 16% to the global revenue of SBD and covers products for engineered fastening and other industrial channels, including solutions for the automotive and aerospace industry and hydraulic tools and attachments.

The smallest segment by contribution to overall revenue (13%) is Security. The product offering spans the Security and Healthcare sector and includes, but is not limited to, electronic safety, automatic doors, and asset tracking solutions.

After looking into the different business segments of SBD, let’s take a look at their target markets by geographic region. Their home market is still accounting for over 60% of the company’s revenue, leaving a lot of room for growth in developed and emerging markets around the world.

Source: Stanley Black & Decker Investor Presentation.

Dividend Growth and Sustainability

SBD’s dividend yield as of July 4 is 1.35% which seems rather unattractive for investors looking to add immediate cash flow to their portfolios. When comparing the yield to the five-year average yield of 1.77%, it appears lower than what has been seen in the recent past.

The following section will cover some history on and judge the sustainability of Stanley Black & Decker’s dividend by examining the payout ratio as well as its growth to determine whether the mining giant makes a compelling case for dividend growth investors.

Dividend History & Growth

SBD has been increasing its dividend paid to shareholders for the last 53 years, and thus achieved the status of Dividend King. Even more impressive is the fact that SBD has paid a dividend consecutively for the last 145 years. Payouts are typically in March, June, August, and November.

Reflecting on the last decade, between 2011 and 2021, the dividend per common share increased by 70.73%, with the last dividend increase announced nearly one year ago on July 14. Even with the consistent payout history, the current yield is nothing to write home about. However, as a dividend growth investor, I would consider keeping an eye out for the next dividend declaration to see what is next as the dividend growth has stagnated recently; maybe it’s finally time to kick it up a notch.

Payout Ratio

Over the past 10 years, SBD’s dividend payout ratio has hovered between 28.27% (current) and 66.67% (2012), with the five-year-average clocking in at 41.73%.

From a payout ratio standpoint alone, I think Stanley Black & Decker is in a very good position at this moment. The ratio indicates that there is enough room to fuel future dividend growth while leaving enough revenue in the company to grow and continue its strategy of growth through acquisition.

Financial Snapshot

Using the Piotroski F-Score to get a first glance at Stanley Black & Decker’s current financial health, it secures an 8 in the 0-9 ranking, which signals a very healthy financial position. A note of caution here: due to operating in a cyclical industry, at various points in time over the last 10 years SBD’s F-Score ranged between 1 and 9.

Over the last five years, the revenue of the company has shown a steadily upwards trend, and while it has to be noted that earnings stayed rather flat during that timeframe, investors were able to observe a recent upswing in earnings and profit margins since late 2020.

Looking at the Debt to Equity history, we can see that the company grew its equity over the same period while keeping the debt rather steady, leading to declining Debt to Equity ratios. Digging a little deeper into the debt metrics, SBD’s debt is well covered by their operating cash flows (53%), and interest payments are covered, considering a 12.3x coverage rate by EBIT.

Investment Case

In the following section, we will dive into the company's Moat, Bull, and Bear cases to outline which headwind the company might face while providing insight into their strategy and growth opportunities.

Moat

Stanley Black & Decker has a wide moat built on the strength of its brands. Whether it’s in a professional or consumer environment, you won’t find a construction or home improvement project not using the products and tools from brands like Stanley, DeWalt, Black & Decker, or Craftsman.

The Bull Case

The pandemic has driven people from urban centers into new homes, especially in the United States, which is a core market for Stanley Black & Decker. This will likely lead to increased organic growth as the demand for tools for DIY projects continues to grow.

In the Earnings call for Q4 2020, the management also predicted growth on the e-commerce channel. SBD is already a leader when it comes to tools sales through e-commerce, and the growing confidence from consumers into e-commerce is generating further tailwinds for the company. Another driver for growth potential is a strong balance sheet and the strategy to grow by acquiring companies to fit their global tools platform, and expanding its business in Infrastructure and Engineered Fastening.

The Bear Case

As a global leader for tools, Stanley Black & Decker naturally faces global competition, resulting in pressure for pricing and to deliver on quality. While the company has its brands established throughout North America and parts of Europe, customers in new markets demand quality and affordability as the company can not rely on reputation alone.

Another risk is a consolidation of resellers, which would naturally account for a lot of the sales volume. We have experienced how household names (think Sears in their Home Market) have collapsed in recent years and account for sizable volume losses which have to be covered by a strong e-commerce channel.

Conclusion

I would not buy Stanley Black & Decker at its current valuation, but it remains on my dividend stock watchlist. Although the company has a healthy balance sheet and is certainly in a position to grow in the future, its current dividend yield combined with the recent slow dividend growth does not meet my criteria to enter a new position.