Dividend paying stocks like Stanley Black & Decker, Inc. (NYSE:SWK) tend to be popular with investors, and for good reason – some research shows that a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
A slim 1.8% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Stanley Black & Decker could have potential. The company also bought back stock equivalent to around 2.2% of market capitalisation this year. Before you buy any stock for its dividend however, you should always remember Warren Buffett’s two rules: 1) Don’t lose money, and 2) Remember rule #1. We’ll run through some checks below to help with this.Click the interactive chart for our full dividend analysis
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Stanley Black & Decker paid out 63% of its profit as dividends. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. The company paid out 50%, which is not bad per se, but does start to limit the amount of cash Stanley Black & Decker has available to meet other needs.
Remember, you can always get a snapshot of Stanley Black & Decker’s latest financial position, by checking our visualisation of its financial health.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Stanley Black & Decker has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was US$1.28 in 2009, compared to US$2.64 last year. This works out to be a compound annual growth rate (CAGR) of approximately 7.5% a year over that time.
Dividend Growth Potential
While dividend payments have been relatively stable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend’s purchasing power over the long term. Earnings have grown at around 3.9% a year for the past five years, which is better than seeing them shrink! 3.9% per annum is not a particularly high rate of growth, which we find curious. If the company is struggling to grow, perhaps that’s why it elects to pay out more than half of its earnings to shareholders.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Stanley Black & Decker’s is paying out more than half its income as dividends, but at least the dividend is covered both by reported earnings and cashflow. Earnings growth has been limited, but we like that the dividend payments have been fairly consistent. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than Stanley Black & Decker out there.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 18 Stanley Black & Decker analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.