Shares of tool-maker Black & Decker (NYSE:BDK) saw more than a quarter's worth of value evaporate, as shareholders headed for the exits upon the company's disclosure of a 20% drop in projected net sales for the first quarter of 2009. The company now expects earnings per share to total a meager 5 cents to 15 cents for the quarter, well below the 79 cents that analysts had been expecting. (Explore the controversies that can surround a company's forward-looking statements in Can Earnings Guidance Accurately Predict the Future?)

The downbeat outlook echoed the recent guidance and actions coming from the tool-making sector at-large. Rivals Stanley Works (NYSE:SWK), Illinois Tool Works (NYSE:ITW) and Snap-On (NYSE:SNA) all have dropped hints recently
of imminent, major slumps in 2009. In addition, Stanley announced late last year the closure of three plants and a 10% reduction in its workforce.

CEO Warns Of Dividend Cut
Black & Decker CEO Nolan Archibald's suggestion that the company may be forced to lower its dividend added to concerns for the tool-maker. Standing at an annual rate of $1.68, Black & Decker's dividend currently provides shareholders a generous 5.5% yield.

So how likely is a cut in the dividend? Frankly, it looks almost certain.

Expected Earnings Unlikely To Support Current Dividend Payment
For starters, earnings for this year and next are expected to come in at roughly half the $5.47 the company reported in 2008. Consensus estimates for fiscal 2009 and 2010 are $2.18 and $2.61, respectively - hardly enough to support the company's hefty dividend. (For more on consensus estimates, be sure to read Whisper Numbers: Should You Listen?)

Ratings Agency Nervous About Debt Levels and Cash Flow
Ratings agency Standard & Poor's took its cue from the weak 2009 outlook to announce a possible downgrade of the company's current BBB rating on long-term debt. Moving the company's rating below this level would basically push it into the "vulnerable" range - essentially, on the cusp of junk status. Such a move would significantly increase the company's future borrowing costs. To avoid further credit weakening that could prompt Standard & Poor's to drop the rating, Black & Decker must employ some cash conservation measures. A dividend cut would be high on the list of options to accomplish this.

A look at Black & Decker's recent balance sheet reveals S&P's grounds for concern. Long-term debt levels of nearly $1.5 billion are now 128% of equity, excluding a sizable $670 million post-retirement liability on the books at the end of 2008.
Hence, Black & Decker's debt level has more than doubled since the end of 2007.

Pension Funding Requirement Set To Grow
This last item was raised as a concern in a recent Argus report. The independent researcher noted that Black & Decker's 70% equity allocation in its pension funds, combined with its disastrous equity market performance over the past year, could force the company to increase its funding contributions going forward, resulting in an additional levy on available cash that could otherwise be paid out as dividends.

Bottom Line
Black & Decker faces a worse-than-expected sales and earnings downturn at a time when it appears to be carrying an excess of liabilities. Therefore, a dividend cut may be unavoidable.



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Tickers in this Article: BDK, SWK, ITW, SNA

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