Viktor_Gladkov/iStock via Getty Images
Viktor_Gladkov/iStock via Getty Images
It's been a wild year so far in 2022, with some truly mind-bending volatility.
Well, guess what my friends? 2022's wild ride is likely just getting started.
And this creates the opportunity for smart long-term income investors to lock in not just good bargains, but Buffett-style "fat pitch" bargains that rich retirement dreams are made of.
Let me share with you why I just added to my position in Stanley Black & Decker (NYSE:SWK ). This isn't just one of my top conviction recs, it's also a top-five recommendation from my fellow Dividend Kings Justin Law and Nicholas Ward, in our Top Buy List.
What does it mean when three of America's leading blue-chip analysts all agree that one of the world's best companies is crazy, stupid, cheap?
It means you could potentially earn 19% annual returns over the next five years, 5X better than the S&P 500 consensus.
But wait it gets better.
SWK offers the potential for 27% annual returns over the next three years, the potential to nearly double your money.
But wait it gets better!
Analyst Median 12-Month Price Target
Discount To Price Target (Not A Fair Value Estimate)
Upside To Price Target (Not Including Dividend)
Upside To Fair Value (Not Including Dividend)
12-Month Median Total Return Price (Including Dividend)
Discount To Total Price Target (Not A Fair Value Estimate)
Discount To Fair Value + 12-Month Dividend
Upside To Price Target ( Including Dividend)
Upside To Fair Value + Dividend
(Source: DK Research Terminal, FactSet, Morningstar)
Analysts expect SWK to deliver 46% total returns in the next year alone!
Why do I care about such an optimistic forecast?
Upside To Fair Value (NOT Including Dividends)
Because SWK's discount to fair value is so great, a return to fair value in the next year justifies a 46% total return.
But wait it gets better!
Buying the world's best cyclical companies during bear markets is a great way to enjoy outsized returns.
But wait it gets even better.
10 Year Inflation And Risk-Adjusted Return
According to management guidance, SWK could deliver 13.2% long-term returns in the future, which is better than many of the most popular investment strategies, including the aristocrats and S&P 500.
What do 13.2% long-term returns potentially mean for you?
(Source: DK Research Terminal, FactSet)
Over the long-term 10.7% inflation-adjusted returns mean a potential 21X return over 30 years.
(Source: DK Research Terminal, FactSet)
It means potentially 2.5X better inflation-adjusted returns than the S&P 500, which is almost certainly not capable of 19% annual returns over the next five years.
I know what you're thinking. "Aren't you the guy warning people about a potential recession in 2023?! How can you be recommending an industrial company before a recession?!"
So let me tell you the method to my apparent madness;)
How much should we be worried about a recession in 2023?
Dividend Kings' Preparing For Recession Video Series
We're preparing our members through a nine-part series because at some point a recession and bear market are inevitable.
(Source: DK S&P 500 Valuation & Total Return Tool) NOT For Market Timing Purposes
The 10-2 curve is the most closely watched by Wall Street but a study from the NY Fed finds that the 10-3 curve is the most accurate at forecasting recessions.
The NY Fed's model estimates the risk of a recession within the next year is about 5.5%.
(Source: St. Louis Federal Reserve)
(Source: St. Louis Federal Reserve)
The St. Louis Fed's model, based on four economic metrics, estimates a 0.0% chance we're in a recession right now.
Currently, the bond market is not overly concerned about recession risk and we are monitoring the situation closely each day and week.
That's through David Rice's Baseline and Rate of Change or BaR economic grid, which tracks 18 leading economic indicators each week.
Currently, the average of all indicators, or mean of coordinates, is 20% above the historical baseline.
Even if a recession is coming next year, the stock market doesn't tend to peak and start a bear market until about 50 days before the recession actually starts.
And that data is confirmed by Bloomberg.
In fact, the median market rally following a 2-10 yield curve inversion (which happened on March 31st) is a 21% gain over the next 18.5 months.
And then right before a recession begins stocks tend to roll over into a 12 month 36% average bear market.
In other words, even if we do get a recession in late 2023 or early 2024, stocks could still go up... a lot.
And guess what's likely to go up a lot more than the 16% overvalued S&P 500?
Deep value Buffett-style fat pitch Ultra SWAN quality dividend kings like SWK.
But what if we do get a recession relatively soon? Wouldn't that hurt Stanley? Isn't it a bad idea to consider buying an industrial with recession risk even at 5.5%?
SWK is one of the world's highest quality companies, and here's how I know this.
The Dividend King's overall quality scores are based on a 243 point model that includes:
credit default swap medium-term bankruptcy risk data
short and long-term bankruptcy risk
accounting and corporate fraud risk
historical cash flow growth rates
long-term risk-management scores from MSCI, Morningstar, FactSet, S&P, Reuters'/Refinitiv, and Just Capital
dividend friendly corporate culture/income dependability
long-term total returns (a Ben Graham sign of quality)
analyst consensus long-term return potential
In fact, it includes over 1,000 fundamental metrics including the 12 rating agencies we use to assess fundamental risk.
How do we know that our safety and quality model works well?
During the two worst recessions in 75 years, our safety model 87% of blue-chip dividend cuts, the ultimate baptism by fire for any dividend safety model.
And then there's the confirmation that our quality ratings are very accurate.
Basically, historical market data confirms that the DK safety and quality model is one of the most comprehensive and accurate in the world.
This is why I entrust 100% of my life savings to this model and the DK Phoenix blue-chip strategy.
How does SWK score on one of the world's most comprehensive and accurate safety and quality models?
Approximate Dividend Cut Risk In Pandemic Level Recession
5% Margin of Safety For A Potentially Good Buy
SWK: 28th Highest Quality Master List Company (Out of 507) = 94th Percentile
The DK 500 Master List includes the world's highest quality companies including:
All global aristocrats (such as BTI, ENB, and NVS)
All 13/13 Ultra Swans (as close to perfect quality as exists on Wall Street)
SWK's 92% quality score means its similar in quality to such blue-chips as
Even among the most elite companies on earth, SWK is higher quality than 94% of them.
SWK was founded in 1843 in New Britain, Connecticut. Since then it's survived and thrived during which it has paid uninterrupted dividends for 145 consecutive years through
SWK is almost certainly going to outlive us all.
SWK is selling its security business for $3.2 billion in 2022.
SWK's capital allocation strategy is very reasonable and prudent.
SWK is planning to sell its security business and double down on tools, including its two most recent acquisitions, announced in December 2021.
The combination of these two high-quality, complementary businesses with our existing outdoor business creates a powerful growth engine with approximately $4 billion in annual revenue across the $25 billion-plus outdoor power equipment industry. These transactions will be accretive to our 2022 earnings and have the potential for further margin expansion as we integrate these great businesses.
SWK has some of the world's most trusted tools brands.
The average EV generates 4.5X the sales per vehicle as regular gas cars.
And electrifying outdoor tools represent a potential growth opportunity in a $25 billion global market.
SWK's R&D is going into improving its products, everything from higher energy density batteries, to faster recharging times, to asset tracking for industrial products (monitors tools as they wear out).
The industrial part of the business has an $85 billion annual addressable market.
SWK has good exposure and growth potential in several major secular megatrends.
How good is SWK at executing on its growth potential?
SWK's capital allocation is so good that its returns on operating capital have doubled over the last 20 years.
SWK's returns on operating capital are the 3rd best in its industry.
With 967% returns over the last 20 years compared to 394% returns for the S&P 500, SWK has proven a very dependable company you can trust with your hard-earned savings.
(Source: S&P, Fitch, Moody's)
Rating agencies estimate SWK's fundamental risk at 2.72%.
SWK's leverage ratios are safe today and expected to get steadily more so.
Management's long-term target is 2.0 debt/EBITDA, a strong investment-grade credit rating (current ones), and a 33% payout ratio.
Like many companies in the pandemic, SWK took on a lot of debt at record low-interest rates.
However, cash flow supporting that debt is growing rapidly and cash on the balance sheet is growing at 28% annually.
Credit default Swaps are insurance policies bond investors take out against default.
SWK's historical profitability is in the top 20% of peers.
Adjusting for the natural cyclicality of its business, SWK's industry-leading profitability has been stable for the last 32 years, confirming a wide and stable moat.
SWK's margins are expected to remain relatively stable in the coming years.
Returns on capital or ROC is Joel Greenblatt's gold standard proxy for quality and moatiness.
ROC = pre-tax profit/operating capital (the money it takes to run the business).
SWK's ROC has been over 60% in the last year and is expected to modestly improve in the next few years.
For three decades SWK's ROC has been trending higher at 2.2% annually over time.
These repurchase actions are a significant step to complete our expected $4 billion share repurchase in 2022," said Stanley Black & Decker's CEO Jim Loree. "These repurchases come as we look to deliver another strong year in 2022 and continue to position the business for a multi-year runway for growth and margin expansion. This program is an attractive use of capital and represents a compelling value." - CEO, buyback announcement
At current valuations, SWK could buy back 17% of its shares according to management.
SWK is opportunistic with buybacks, sometimes issuing shares to make major acquisitions and other times buying back 10% of its shares in a single year.
(Source: DK Research Terminal, Ycharts)
And even if SWK only buyback a modest historical 0.8% of its stock each year that 21% potential share count reduction over the next 30 years.
Bottom line, SWK has survived and thrived through eight depressions, including the Great Depression.
What does a steadily growing $110 billion addressable market and just 14% market share mean for SWK's medium-term growth prospects?
SWK is expected to deliver very solid high single/low-double-digit top and bottom-line growth through 2024.
(Source: FAST Graphs, FactSet Research Terminal)
SWK is expected to deliver very steady growth in the coming years, though cash flows are expected to be more volatile based on the timing of recessions.
Of the 20 analysts covering SWK on Wall Street, the median long-term growth consensus is...11%, the midrange of management's long-term guidance.
Analysts are saying to buy SWK.
Morningstar is saying the same thing.
No less than three of the Dividend Kings are screaming from the rooftops that SWK is a potentially very strong buy.
For anyone comfortable with its risk profile SWK is a potentially very strong buy.
What about its risk profile?
There are no risk-free companies and no company is right for everyone. You have to be comfortable with the fundamental risk profile.
One reason SWK is down so much in recent weeks.
Stanley Black & Decker today announced that it plans to restate its previously issued consolidated financial statements to correct its accounting with respect to its Equity Units in response to comments received from the Securities and Exchange Commission (the "SEC").
After giving effect to this change, the Company's diluted GAAP earnings per share are reduced by $0.31, $0.24, and $0.14 for the fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018, respectively. Excluding acquisition-related and other charges, the Company's diluted earnings per share are reduced by $0.36, $0.31, and $0.27 for the fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018, respectively. This accounting correction was reflected on a prospective basis as previously discussed on Form 8-K and Form 10-Q as filed on November 12, 2021.
The changes will not impact the Company's historical net earnings and do not affect compliance with the financial covenants contained in the Company's outstanding debt instruments or compliance with any other agreement of the Company or its subsidiaries. The effects of these changes are detailed in a Current Report on Form 8-K that is also being filed with the SEC today. - Press release
These kinds of restatements happen from time to time.
The continued creation, development, and advancement of new technologies such as 5G data networks, artificial intelligence, blockchain, quantum computing, data analytics, 3-D printing, robotics, sensor technology, data storage, neural networks, augmented reality, amongst others, as well as other technologies in the future that are not foreseen today, continue to transform the Company's processes, products, and services." - 10-K
SWK's risk profile stretches 14 pages in its annual report.
How do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.
Here is a special report that outlines the most important aspects of understanding long-term ESG financial risks for your investments.
"'ESG is just normal risk by another name.' Simon MacMahon, head of ESG and corporate governance research, Sustainalytics" - Morningstar
"ESG factors are taken into consideration, alongside all other credit factors, when we consider they are relevant to and have or may have a material influence on creditworthiness." - S&P
ESG is a measure of risk, not of ethics, political correctness, or personal opinion.
S&P, Fitch, Moody's, DBRS (Canadian rating agency), AMBest (insurance rating agency), R&I Credit Rating (Japanese rating agency), and the Japan Credit Rating Agency have been using ESG models in their credit ratings for decades.
Dividend Aristocrats: 67th Industry Percentile On Risk Management (Above-Average, 24/100 Medium Risk)
(Sources: MSCI, Morningstar, Reuters', Just Capital, S&P, FactSet Research)
Good - Bordering On Very Good
SWK's risk-management consensus is in the top 30% of the world's highest quality companies and similar to that of such other companies as
The bottom line is that all companies have risks, and SWK is good at managing theirs.
When the facts change, I change my mind. What do you do sir?" - John Maynard Keynes
There are no sacred cows at iREIT or Dividend Kings. Wherever the fundamentals lead we always follow. That's the essence of disciplined financial science, the math behind retiring rich and staying rich in retirement.
I can't tell you whether or not a recession is coming in 2023 or 2024.
I can't tell you when this correction will end.
I can't tell you how high the Fed will hike interest rates or how fast.
No one else can either.
"Nobody can predict interest rates, the future direction of the economy or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you've invested." - Peter Lynch
But it doesn't take a crystal ball to get rich with the world's best blue-chips.
Reasons To Potentially Buy SWK
SWK is the ultimate example of how its always and forever a market of stocks, not a stock market.
While the S&P 500 is still 16% historically overvalued, SWK is a 30% screaming bargain.
While many speculative tech names still trade at absurd valuations, you can buy SWK at just 10.1X cash-adjusted earnings.
How absurdly great of a bargain is this?
Today SWK is a bargain even by private equity standards!
And it's one of the world's greatest companies, growing at double-digits.
"Luck is what happens when preparation meets opportunity." - Roman Philosopher Seneca the younger
If you're tired of spinning your wheels and fretting about the Fed, interest rates, inflation, the war, and recession, then maybe it's time to start making your own luck.
Because if there is one thing I know with 80% absolute certainty, it's that a company that has never missed a dividend payment for 145 years, through eight depressions, represents the ultimate sleep well at night long-term "buy and hold forever" investment.
Dividend Kings helps you determine the best safe dividend stocks to buy via our Automated Investment Decision Tool, Research Terminal, Phoenix Watchlist, Company Screener, and Daily Blue-Chip Deal Videos.
Click here for a two-week free trial so we can help you achieve better long-term total returns and your financial dreams.
This article was written by
Adam Galas is a co-founder of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 5,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.
The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha).
I'm a proud Army veteran and have seven years of experience as an analyst/investment writer for Dividend Kings, iREIT, The Intelligent Dividend Investor, The Motley Fool, Simply Safe Dividends, Seeking Alpha, and the Adam Mesh Trading Group. I'm proud to be one of the founders of The Dividend Kings, joining forces with Brad Thomas, Chuck Carnevale, and other leading income writers to offer the best premium service on Seeking Alpha's Market Place.
My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives.
With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and safe and dependable income streams in all economic and market conditions.
Disclosure: I/we have a beneficial long position in the shares of SWK either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Dividend Kings owns SWK in our portfolios.