Stanley Black & Decker, Inc. (NYSE:SWK) has paid its dividend for 139 consecutive years and increased it for the past 48 consecutive years. In two years, SWK 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. In the case of SWK, the stock has also sold off by 15% since mid-December 2015 and trades at about 15x forward earnings, making the investment case even timelier for consideration in our Top 20 Dividend Stocks portfolio.
A total of 32 funds among those tracked by Insider Monkey held shares of SWK at the end of September 2015, slightly higher than 31 funds a quarter earlier. Moreover, during the third quarter of 2015, the aggregate value of their holdings slid to $990.45 million from $1.17 billion and totalled 6.70% of the company. Richard S. Pzena’s Pzena Investment Management owns 3.11 million shares of SWK as of the end of September, followed by John W. Rogers’ Ariel Investments with 1.49 million shares.
Business Overview
SWK 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, and Bostitch.
SWK’s largest end markets by 2014 revenue are residential / repair / DIY (20%), new residential construction (15%), non-residential construction (17%), industrial / electronics (17%), automotive production (8%), and retail (5%).
By segment, SWK generated 62% of its 2014 revenue from Tools & Storage, 20% from Security, and 18% from Industrial.
By geography, SWK generated 49% of its 2014 revenue from the U.S., 25% from Europe, 17% from emerging markets, and 9% from the rest of the world.
Business Analysis
SWK’s primary competitive advantages are its strong brands, product innovation, and global distribution channels.
SWK’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, SWK 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 8th most patents in the world from 2010-2014.
Innovation is a clear driver for the business, and SWK 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, Inc. (NYSE:SWK) 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 we expect more of the same to continue over the next decade as it continues consolidating its markets.
SWK’s extensive distribution channels and shelf space are also 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, SWK has number one global market share across power tools and hand tools and number two market share in engineered fastening and commercial electronic security services. With leading market share positions, SWK’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 (20% of sales) and Industrial (18%) segments, SWK’s business benefits from a partial recurring revenue model. It is tied to several large automotive companies that have selected SWK’s highly engineered fasteners for their models, 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) is another big advantage that has enhanced SWK’s operating discipline. SFS has five primary elements that work together: sales and operations planning, operational lean, complexity reduction, global supply management, and order-to-cash excellence. SWK develops business processes and systems to reduce costs and improve the company’s return on capital.
As an example, SWK was able to improve its working capital turnover by 56% from the end of 2010 to the end of 2014. This frees up more cash that can be used for acquisitions or returned to shareholders through buybacks and dividend increases.
Over the next three years, SWK targets 4-6% organic sales growth and expects to resume acquisitions (during 2013, SWK placed a moratorium on acquisitions to focus on near-term priorities of operational improvement and deleveraging). With continued margin expansion and operating leverage, SWK expects earnings to grow by 10-12% per year.
