Dividend-King Stanley-Black & Decker Is A Buy

Downgraded, But …

Bank of America (BAC) sent some ripples through the investment waters when it downgraded Stanley-Black&Decker (SWK). The downgrade, from Buy to Neutral, is accompanied by a lower price target that suggests the company is fairly valued. Upon review of the note, I’ve found the move to be one of caution, not bearishness, and one that has helped to set up a buying opportunity for this Dividend King.

What The Analyst Has To Say

Bank of America warns that after years of battling trade-war-related headwinds and now the pandemic, the company’s push towards margin-resiliency may impair innovation. Along with innovation, BoA says the company’s long-term competitive positioning could be in danger, and that a need to onshore more of the supply may get overlooked.

What BoA goes on to say is that Stanley-Black&Decker could be one of the strongest top-line growers in the industry. BoA also says the company should also expect solid free-cash-flow growth as well. What I read in the statement is a bunch of ifs that add up to one big if. Add in the new price target, a target that says the stock has about 10% upside in it, and the picture begins to clear. Bank of America thinks this stock could go higher but they just aren’t that sure about it.

The analyst’s community at large is a little more sure of its position. The average rating for this stock is Bullish bordering on Very Bullish. Out of 21 current ratings, more than half are Buy or Strong Buy while only one is outright bearish. The consensus price target is closer to $130 which puts the potential for gains in the range of 20% and that is not counting dividend payments.

A Dividend King, To Be Sure

Stanley-Black & Decker is a Dividend King and one with an attractive dividend. At today’s prices, the stock is paying just over 2.5% with a high expectation of future distribution increases. The company is running a low 55% payout ratio, not the lowest I’ve ever seen but one that is easy to manage, assuming revenue and earnings can hold up. In terms of history, the distribution has been increased for 51 years and the company is on track for another increase this year. Based on history, the next increase should come with the next earnings report.

Regarding the earnings outlook, earnings are expected to decline this year and sharply, about 30%, but there are mitigating factors. The first is that the payout ratio is taking this into account so, with the company’s cash position and plans to reduce spending, the dividend looks fine.

The second mitigating factor is that 1st quarter earnings were much better than expected and the economy is reopening. In my view, this means the rest of the year should be better too. The third mitigating factor is that revenue and EPS growth will resume next year, to the tune of 40% in the case of EPS, further strengthening the company’s dividend-paying ability.

The Technical Outlook: A Buying Opportunity Is At Hand

The technical outlook for Stanley-Black & Decker is a little mixed for the very-near-term but, regardless of the outcome, a buy signal is at hand for long-term dividend investors. What I mean is this; the stock has bottomed but the bottoming may not be over. Shares of SWK have been in consolidation for several weeks since hitting the bottom. The current indication is lower but only within the recent range. Support may be confirmed at the bottom of the range but, if not, a move down to retest stronger support could be on its way. In that scenario, dividend investors will get chance to buy at a lower price and higher yield.

If support is confirmed at the bottom of the range it will be time to start nibbling. In that case, I would expect to see the stock continue to trend sideways if not drift higher. The real signal, the more bullish signal, will be when price action retests the top of the range and moves higher. In that case, dividend investors may pay a higher price with lower yield but momentum will be on their side. In either case, the long-term outlook for SWK is bullish with a chance of moving up to the $150-$160 range over the next 12 to 18 months.