2 Industrial Stocks That Are Too Cheap to Ignore

Most investors look at the price-to-earnings ratio as an important valuation metric, even though earnings can often be incredibly volatile. I prefer to look at dividend yield because dividends tend to be very consistent over time. Historically high dividend yields at Stanley Black & Decker (NYSE: SWK) and A.O. Smith (NYSE: AOS) suggest that these two industrial stocks are entering buy territory. Let's take a closer look at these two industrial stocks that are too cheap to ignore.

1. Stanley Black & Decker: It's been ugly

There's no way to put a positive spin on Stanley Black & Decker's 2022 results. Coming into the year, the company guided to an adjusted earnings range of $12 to $12.50 per share. By the third quarter of 2022, that range had dropped to just $4.15 to $4.65 per share. That's terrible -- and helps to explain why the stock price is down by roughly 50% over the past year.

A hand drawing a chart comparing cost and value.

Image source: Getty Images.

There are a lot of moving parts here, including fast-rising inflation, supply chain bottlenecks, and a pullback from outsized pandemic-related sales. Management is not sitting still, as it embarked on a major cost-cutting effort, and it is accepting some near-term pain to reposition the company for the long term (reducing inventory levels, for example). Stanley Black & Decker is also working to shore up its balance sheet, which is a bit bloated after a big acquisition. It will take time, but the company appears to be taking realistic steps to get back on track.

What makes Stanley Black & Decker's stock so interesting is that the stock drop pushed the dividend yield up to 3.7%, toward the high end of its historical range. In a sign of confidence, the board just increased the dividend in September, despite the headwinds. The dividend has been increased annually for over 50 years, as well, making the company a Dividend King.

Although times are tough right now, given the company's history, it probably makes sense to give Stanley Black & Decker the benefit of the doubt here. And you'll be paid very well, historically speaking, to wait for the business to recover.

2. A. O. Smith: In hot water

Another industrial stock with a historically high yield is A.O. Smith, which makes hot water heaters, water filtration, and air filtration products. Business performance has been weak of late, thanks to inventory rationalization in North America and a tough housing market in China. That's why the company's stock fell more than 20% over the past year. These should be manageable headwinds over the long term.

Notably, the North American inventory problem will only last until the company's customers whittle down their inventory levels. Once that takes place, they will have to start ordering at more normal rates given the highly reliable nature of hot water heater sales in the region (roughly 80% of sales in North America are for the replacement of a broken water heater). China's housing market is a bigger wildcard, but given the fact that hot water is an affordable luxury, it is hard to believe that the country will suddenly stop buying water heaters.

Looking longer-term, meanwhile, A.O. Smith is hoping to build a business in India that rivals its success in China. In the third quarter of 2022, sales in India grew 16% year over year, so there's actually some good news here hidden beneath the negatives. Still, with the big stock decline, the yield has moved up toward the high end of its range over the past decade.

The roughly 2% yield is hardly huge, but the story here is more about dividend growth than yield. Over the past decade, A.O. Smith's dividend has increased at an annualized rate of 20%. And given the nearly three decades of annual increases, it probably makes sense to give A.O. Smith the benefit of the doubt, too.

Contrarian thinking is required here

It's not easy buying when most other people are selling, but given the dividend histories and yield trends at Stanley Black & Decker and A.O. Smith, that's exactly what you might want to consider. Both have long histories of rewarding investors well over time, and both are taking steps to ensure they can keep rewarding investors in the future. If you are a dividend investor with the fortitude to go against the crowd, it looks like these two stocks are too cheap to ignore.

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Reuben Gregg Brewer has positions in Stanley Black & Decker. The Motley Fool recommends A. O. Smith. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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