Stanley Black & Decker (NYSE: SWK) and Snap-on Incorporated (NYSE: SNA) are two leading manufacturers of tools, equipment, diagnostics, and repair information and systems solutions for professional users operating internationally. Both companies have achieved exceptional shareholder value creation through the decades, and they are also known for their robust dividend-growth track records.
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With Stanley Black & Decker declining dramatically from its previously overvalued levels and Snap-on also trading at an attractive valuation, I am bullish on both stocks.
Are Tool Manufacturers Recession-Proof?
The ongoing macroeconomic turmoil and rise in rates are apparently driving us into a recession. Thus, it makes sense to hold companies that can operate resiliently during such a harsh scenario.
On the one hand, to say that tool manufacturers such as Stanley Black & Decker and Snap-on are recession-proof would be far-fetched. Since construction and repairing activity is likely to decline during an economic downturn, both companies’ top lines are bound to take a hit as well.
On the other hand, however, professionals need to renew their equipment over certain periods while much of their gear is bought on credit, which means that tool manufacturers enjoy somewhat recurring and predictable cash flows. This allows Stanley Black & Decker and Snap-on to manage their inventories successfully and thus remain consistently profitable. In fact, save for some minor losses in 1998-99, both companies have never posted a money-losing year since 1989.
Which is the Better Dividend Stock?
Stanley Black & Decker is likely the better dividend stock for more conservative, income-driven investors, with its 4.2% yield being quite noteworthy. That said, the 2.7%-yielding Snap-On is likely to be appreciated more by those who seek more vigorous dividend-growth prospects. Let’s examine their most relevant dividend metrics.
Stanley Black & Decker’s Dividend Prospects
Stanley Black & Decker boasts one of the most impressive dividend-growth track records in the market, now counting 55 years of consecutive annual dividend hikes.
Despite such a prolonged dividend-growth track record, dividend hikes over the past five years have averaged a respectable 5.7%. The latest hike was by a negligible increase of 1.3% this past July, as management expects inflationary pressures, rising interest rates, and significantly slower demand in late May and June to damage the bottom line this year.
Specifically, management expects the company to achieve adjusted earnings per share between $5.00 and $6.00 in Fiscal 2022, implying a massive decline of 50% at the midpoint compared to last year. However, analysts expect earnings to rebound quickly in the coming years, suggesting that dividend growth is likely to accelerate from next year. Nonetheless, even with such a hit in earnings, the payout ratio still stands at a rather healthy 58%.
Snap-on’s Dividend Prospects
Snap-On only counts 12 years of successive dividend hikes, but this is only because the dividend remained constant between 2009-10. This was also the case between 2003-06 and 1994-95. Excluding these periods of stable payouts, however, dividends have been increased every other year, and it has never been cut.
Dividend hikes have also occurred at a rather rapid pace, with the 10-year and five-year dividend-per-share CAGRs standing at 14.7% and 15%, respectively. The latest dividend was also by a satisfactory 15.4%. Analysts expect the company to achieve earnings per share of around $16.56 this year, implying a payout ratio under 35%. Accordingly, rapid dividend hikes should also continue at a rapid pace.
Is SWK Stock a Buy, According to Analysts?
Turning to Wall Street, Stanley Black & Decker has a Hold consensus rating based on three Buys, 10 Holds, and one Sell assigned in the past three months. At $101.31, the average Stanley Black & Decker stock price prediction implies 27.76% upside potential.
Is SNA Stock a Buy, According to Analysts?
Snap-on Inc. stock has a Moderate Buy consensus rating based on two Buys assigned in the past three months. At $289, the average Snap-on stock price prediction implies around 33.6% upside potential.
Conclusion: Fairly Valued Dividend Growth Picks
At their current price levels, I believe that both Stanley Black and Decker and Snap-on are relatively reasonably valued.
Shares of Stanley Black and Decker have lost around 58% of their value year-to-date, as the stock had admittedly gotten overvalued following last year’s euphoria in the market. Currently, the stock is trading at around 14.4x the midpoint of management’s guidance, which is an attractive multiple considering earnings per share should gradually converge toward last year’s $11.20 once the ongoing headwinds ease.
Shares of Snap-On have traded flat over the past year, as the stock has never run ahead of itself. Based on its consensus earnings-per-share estimate, the stock is trading at a forward P/E of around 13.2x, quite close to that of Stanley Black and Decker.
I believe that at their current valuations, both companies will have the opportunity to execute their stock buyback plans, as they have done historically when their shares have traded at below-average multiples.
Specifically, Stanley Black and Decker has reduced its share count by 13.4% since 2012. It may not sound like much, but the company has acquired many companies since then, so in reality, the adjusted percentage is much higher. On the other hand, Snap-On has repurchased around 8.4% of its stock during the same period.
Combined with the fact that both companies’ dividend-growth prospects should remain robust moving forward, I believe that Stanley Black and Decker and Snap-On can be fruitful investment opportunities at their current price levels.
