Key Risks
With strong brands and a well-diversified portfolio of products in slow-changing markets, it’s no surprise that SWK has successfully been in business for more than 175 years.
In our opinion, most of the risks faced by the company are related to currency fluctuations and macroeconomic trends. Construction and remodeling projects are two major business drivers which tend to move in cycles. In the U.S., 2015 was the best year for existing home sales since 2006, which suggests some of SWK’s business has been benefiting from unusually strong economic tailwinds. Should the housing market unexpectedly roll over, there could be a great buying opportunity.
However, we don’t see any secular themes playing out that would necessarily challenge long-term demand for SWK’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, SWK expects to resume its acquisitive strategy over the next few years.
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, SWK acquired European security company Niscayah in 2011. The business started losing customers throughout the integration process and forced SWK to later miss earnings guidance.
Otherwise, we think SWK’s continued branding and product innovation investments will continue serving it well across its large and fragmented markets. It’s worth monitoring if customers begin switching to lower-priced products, especially in emerging markets, but brand loyalty seems to be pretty high across most of SWK’s product categories.
Dividend Analysis
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. SWK’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
SWK’s dividend Safety Score of 66 indicates that the company’s dividend is very safe. With such an impressive streak of paying dividends, this should not come as a surprise.
Over the last four quarters, SWK’s dividend has consumed 43% of its earnings and 40% of its free cash flow. As seen below, the company’s payout ratios have generally remained between 30-40% over the last decade, which is in line with management’s 30-35% target. This is a relatively low payout ratio that provides plenty of dividend safety. Even if SWK’s cash flow was unexpectedly cut in half, it would still be more than enough to cover the dividend.
Source: Simply Safe Dividends
Source: Simply Safe Dividends
