SWK-featured image-dividend growth investors

SWK – Down but an opportunity for the dividend growth investor

Down but not out – SWK for long-term investments

SWK has been a wonderful investment for a dividend growth investor. It has a long track record (more than 50 years) of raising the dividend that they pay to investors. This is 50 years through thick and thin. Recessions? Raise the dividend. War? Raise the dividend. Political turmoil? Raise the dividend.

Like all good companies, events will sometimes conspire and collide with the firm’s fortunes. In this case, SWK has had a few challenging circumstances, particularly with their supply chain and both cost blowouts as well as weaker revenue. Combined, their earnings have taken quite a substantial hit as we can see in Figure 1. Despite over a decade of growing earnings, the earnings have taken a punch to the gut and substantially declined, with a very adverse revision from management.

SWK-2022-08-historical performance for dividend growth investors
Figure 1. SWK-2022-08-historical performance for dividend growth investors. Historical Graph – Copyright © 2011-2022, F.A.S.T. Graphs™ – All Rights Reserved.

Making the case for a dividend growth investor

Does the company have a long history of dividend raises? Yes, it has over 50 years of dividend growth. Do they have a strong commitment to the dividend and their shareholders? Yes – they will protect their dividend and have a valuable share buyback program.

There is no opportunity for strong future growth without some adversity in the market.

In this case, SWK looks like a good opportunity at this point in time with the strong sell-off where the share prices have dropped over 50% over the last year. Note that this was moving from a point of overly rich valuation (over-valuation) at over $200 a share in 2021 to a more reasonable value based on the current earnings estimates for 2022.

Dividends

The stock has a dividend yield, at this price, of 3.42% (Source: Fastgraphs, Figure 2). It will not set the world on fire. It is a good yield, however, from a company with a long history of dividend payments. Fastgraph shows dividend increases of about 3 to 7% in recent years. Again, nothing to write home about in terms of rapid DGRs.

This is a solid company with solid dividends and solid dividend raises. It is a bread-and-butter core holding if you are into long-term dividend growth investing.

Growth opportunities

How else can you benefit from this company at this price?

Figure 2 shows the future earnings estimates which should be of interest for a dividend growth investor. This is predicated largely on the successes of the firm in its supply chain transformation project and cost-cutting initiatives. But the firm has a long history and should be able to pull off much of what they are working on.

If we consider the firm trading at a 15x PE ratio at the end of 2024 with earnings as estimated, this suggests a share price of about $146 (Figure 2), giving a total annualized rate of return of 23%. This includes a reasonable return of the company earnings through dividends as well as price appreciation to match the growth in earnings.

SWK-2022-08-analyst forecasts for dividend growth investors
Figure 2. SWK-2022-08-analyst forecasts for dividend growth investors. Analyst Estimates Graph – Copyright © 2011-2022, F.A.S.T. Graphs™ – All Rights Reserved.

Growth risks

There are still many challenges facing the firm and they will struggle to perfectly address all the underlying supply chain and cost issues during the transformation. They may fall short in their transformation, leading to future earnings increases that are more muted than those shown in Figure 2. This would dampen future expectations for the average dividend growth investor.

In the near-term, we might expect further deterioration in the stock price as the earnings may still need to ‘bottom out’ a little. While the stock has declined substantially, we might still see another $10 to $20 decrease in the stock prices. This means that we have some margin of safety with the opportunity to wait and continue to buy at further depressed prices in a way that will increase future returns.

Verdict – a buy for long-term investors

I suggest that this is a ‘BUY’ for those looking for a permanent, forever stock in their portfolio. If you have a five-year time horizon, you might be able to build a position here and rotate out of it when the firm succeeds and the share price recovers.

A long-term dividend growth investor should be interested in the stock because of the reasonable yield at this price and its long-term history and commitment to the dividend. It will continue to pump those dividends over the decades. It also offers some capital appreciation opportunities. It should be a solid compounded again, despite the near-term issues facing the company.

As there are likely to be further declines, it may be a good point here to consider dollar cost averaging into the stock, to prevent being ‘all in’ and facing further short-term declines.

Down but not out – SWK for long-term investments SWK has been a wonderful investment for a dividend growth investor. It has a long track record (more than 50 years) of raising the dividend that they pay to investors. This is 50 years through thick and thin. Recessions? Raise the dividend. War? Raise the dividend.…

Down but not out – SWK for long-term investments SWK has been a wonderful investment for a dividend growth investor. It has a long track record (more than 50 years) of raising the dividend that they pay to investors. This is 50 years through thick and thin. Recessions? Raise the dividend. War? Raise the dividend.…

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