Every week we pick up on another dividend paying stock from the exclusive Dividend Aristocrats Index. This week we’re taking a deep dive into a popular brands that’ become synonymous with power tools – Black & Decker.
We’ll be dissecting the company to see what it does and how it does it. Taking a look under the hood and analyzing the financial should let us see if the company is worth investing in at current prices.
About Stanley Black & Decker
More commonly known as the Black & Decker corporation, this company has a long history of creating power tools that are simply loved by homeowners. Any DIY enthusiast is certain to have at least one tool from this brand as part of their renovation and construction arsenal.
Headquartered in Towson, Maryland, B&D is a quintessential American company. S. Duncan Black and Alonzo G. Decker started a small machine shop in the year 1910. Both men had worked together at the Rowland Telegraph company for over six years before they decided to partner up and start their own venture.
It took them seven years to come up with a novel invention that would change the company’s destiny. The creators combined a pistol grip with a trigger switch to create the first electric drill. When they filed the patent for this invention it was one of a kind. Word spread quickly and by the time the company was granted the patent in 1917, sales at the small machine shop in Baltimore were booming.
Over the years the company has expanded by inventing new power tools that solve a crucial problem or by acquiring other companies. Black & Decker grew in popularity after it listed shares on the New York Stock Exchange in 1936 and received the Army-Navy “E” Award for supplying the army and navy with tools during the Second World War.
Today, the company owns several stores and some popular power tool brands including:
- Emhart Teknologies
- Oldham Blades
- Black and Decker Firestorm
The largest segments of customers for the company include DIY enthusiasts, construction industry workers, electronics, retail, and automotive repairs. Two-thirds of the business’ revenues come from Tools & Storage, while security and industrial contribute 205 and 18% respectively.
Nearly half (49%) of the firm’s revenues are generated within the United States of America. A quarter comes from Europe and the rest 17% from emerging markets.
Black & Decker has an enviable business model. The brands recognition and widespread network of distributors is an obvious competitive advantage. The company has also enhanced this competitive advantage by innovating new tools every single year. The parent company has nearly 13,000 active patents across the world. Every year it files another thousand patent applications, many of which are accepted.
Another way the company has managed to secure and expand the competitive edge is by acquiring innovative young companies in the sector. Since 2002, the company has spent well over $6 billion in acquisitions.
In the past year, Stanley Black & Decker generated $11.4 billion in revenue, had a 14.4% net profit margin, and earned $6.51 per share. The company has increased its dividend this year, which marks the 49th year in a row that it has done so. Also, the company announced a share buyback program of $350 million of shares this year.
There’s no doubt it’s been doing well financially, but is the stock worth it?
The company pays a sizable dividend every year. This past year the annualized dividend yield has been 1.75%. With a payout ratio of nearly 33%, the company pays one-third of earnings in the form of dividends – healthy dividend stock, to say the least. Over the past four quarters, SWK has paid $2.32 per share in the form of dividends.
Now consider the cash return on investment, which is 16%. Combining the ROE with the retention rate (67%), we get an estimated long-term growth rate of 10.7%.
So, applying the Dividend Discount Model with and assumed required rate of 12%, the valuation works out as follows:
Value per share = $2.32 / (12%-10.7%) = $85.93
The current price of each SWK share is $132. That means the stock is nearly 54% overvalued. The company may have to spike the dividend or boost the growth rate to justify the current price.
At this price it is hard to recommend buying this high-quality company.