Updated on February 3rd, 2021 by Josh Arnold
PPG Industries (PPG) is one of the largest paint companies in the world. It is also one of the most reliable dividend stocks in the market–PPG has paid dividends every quarter since 1899.
Moreover, the company has increased its dividend each year for the last 49 years, which qualifies it to be a member of the exclusive Dividend Aristocrats list. This is a group of 65 stocks in the S&P 500 Index with at least 25 consecutive years of dividend growth.
We consider the Dividend Aristocrats to be among the elite dividend-paying companies. With this in mind, we created a full list of all 65 Dividend Aristocrats. You can download the entire list, with important financial metrics like dividend yields and P/E ratios, by clicking on the link below:
PPG’s remarkable dividend consistency gives it broad appeal to the more conservative members of the dividend growth investing community. Indeed, the company has a very safe dividend payment with room for steady dividend increases each year, thanks to its strong business model. This is still very much the case today.
The only question as to whether the stock is a buy today, is PPG’s elevated valuation. This article will analyze PPG’s investment prospects in detail and determine whether the company merits a buy recommendation at current prices.
PPG Industries was originally founded in 1883 as a manufacturer and distributor of glass. PPG stands for Pittsburgh Plate Glass, which is a reference to the company’s original operations. Over time, PPG has made remarkable strides in becoming an industry leader in the paints and coatings industry.
PPG is a large-cap stock with a market capitalization of $33 billion. With annual revenues of nearly $16 billion, PPG’s only competitors of similar size are fellow Dividend Aristocrat Sherwin-Williams (SHW), as well as Dutch paint company Akzo Nobel (AKZOY).
PPG Industries has grown to such an impressive size thanks to its worldwide operating presence and focus on technology and innovation. The company has approximately 47,000 employees located in more than 70 countries at 150 unique locations.
Its research and development focus is a key differentiator between PPG and other paint & coatings companies. Because of its heavy R&D investments, PPG has grown to be a market leader today. In addition, PPG has a long history of accretive acquisitions that have helped it grow over time.
Source: Investor presentation, page 12
PPG has been very busy in just the past couple of months, securing acquisitions that will add nearly $2 billion in revenue to its top line, and will also bolster its international presence. PPG has a very long history of successful acquisitions, meaning it can grow not only organically, but through purchasing scale and market share as well. This is highly attractive in terms of the contribution to long-term growth.
The company continued to outperform in 2020. PPG’s fourth quarter and full-year earnings showed growth against the same period a year ago. Revenue was up 2.5% to $3.8 billion, while earnings-per-share were up 21% to $1.59. For the year, adjusted earnings declined due to COVID headwinds, but we see the rebound in Q4 as bullish for 2021.
Volumes in Q4 were down 1.5% as higher prices helped to offset some of the damage. Residential coatings were in strong demand as consumers remodeled, and industrial coatings saw revenues rise 7%. Our initial estimate for 2021 is $6.98 in earnings-per-share, as conditions should be much more normalized than 2020.
By and large, a company’s ability to increase revenues and profits is a function of its capital allocation. PPG has spent billions of dollars in recent years buying its next generation of growth. PPG tries to maintain a somewhat balanced capital allocation strategy, but it is also not afraid to spend big on acquisitions when opportunities present themselves.
PPG has spent much more of its deployed cash on share repurchases than its competitors, which has been a major source of earnings-per-share growth over time. It is also likely that mergers and acquisitions will be a continued focus for PPG moving forward, as the company moves back towards its core competency of portfolio optimization.
Acquisitions have been a key growth driver for PPG for many years. Indeed, we saw this above with the company’s buying spree that began in December.
Source: Investor Presentation, page 9
The company spent $1.2 billion on acquisitions in 2020, and is well on its way to matching or exceeding that figure in 2021. Even so, it didn’t use all the cash it generated in 2020, so this strategy is not only lucrative, but it is also sustainable.
PPG is now virtually exclusively a coatings business. The transformation in recent years away from legacy businesses like glass and chemicals has left the company with an impressive portfolio of coatings products that collectively generate nearly $16 billion in annual revenue. PPG recognized years ago that its future growth would be in coatings, and has positioned itself accordingly.
PPG’s track record suggests that its underlying business is likely to continue growing at a satisfactory rate for the foreseeable future. In the past decade, the company has grown its earnings-per-share at an average rate of just over 5%. We note that 2020 earnings were artificially depressed from COVID, and that PPG’s long-term growth rate is much better than 5%.
PPG has been an elite growth stock for a long time. This growth has not been linear, as there have been ups and downs from year to year, but over time, PPG has delivered impressive growth.
Given its very strong fundamentals and its focus on coatings, we believe investors can reasonably expect 8% adjusted earnings-per-share growth from PPG Industries through full economic cycles, using 2021 projected earnings as the base. However, PPG’s performance is likely to suffer during periods of economic recession. The good news is that we would likely see such an event as a buying opportunity of this high-quality business.
Competitive Advantages & Recession Performance
PPG enjoys a number of competitive advantages. It operates in the paints & coatings industry, which is economically attractive for several reasons. First, these products have high profit margins for manufacturers. They also have low capital investment, which results in significant cash flow. PPG has put this significant cash flow to use over time, as discussed above.
Given all this, it makes sense that there are just two coatings companies (Sherwin-Williams and PPG Industries) in the Dividend Aristocrats list.
With that said, the paint and coatings industry is not very recession-resistant because it depends on healthy housing and construction markets. This impact can be seen in PPG’s performance during the 2007-2009 financial crisis:
- 2007 adjusted earnings-per-share: $2.52
- 2008 adjusted earnings-per-share: $1.63 (35% decline)
- 2009 adjusted earnings-per-share: $1.02 (37% decline)
- 2010 adjusted earnings-per-share: $2.32 (127% increase)
PPG’s adjusted earnings-per-share fell by more than 50% during the last major recession, and took two years to recover. The silver lining during a recession is that home owners may be more likely to paint their houses than to move or take on more costly home renovations.
As PPG’s 2020 results showed, the decline in new construction is the dominant factor for PPG during a recession. The 2020 recession was no different, as PPG faced factory shutdowns and severely reduced demand from consumers, although that proved to be transitory.
While the long-term prospects of this Dividend Aristocrat remain bright, investors should be willing to accept volatility in a recession. If anything, a recession and corresponding decline in PPG’s share price would allow investors to purchase more shares of this stock at a much more attractive price.
Valuation & Expected Total Returns
We are forecasting earnings-per-share of $6.98 for this fiscal year, putting the price-to-earnings ratio at 20.2. That compares unfavorably to our fair value estimate of 17 times earnings, meaning PPG is somewhat overvalued today. As such, we expect a modest ~3% headwind to total returns from valuation in the coming years.
With the stock recently hitting all-time highs, we see patience for investors as key to not chase the stock, and wait for a slightly better price and dividend yield.
We see PPG producing ~5.9% total returns in the years to come, consisting of the current 1.5% dividend yield, 8% expected annual earnings growth and a headwind from changes in the stock’s valuation. Given this, we continue to rate PPG a hold.
PPG Industries has many of the characteristics of a very high-quality business. It has a proven business model, and has generated strong growth over the past several years. It has a significant international presence, and multiple catalysts for future growth. Lastly, it has increased its dividend for nearly 50 years.
However, the recent run in the share price, combined with earnings that are in recovery mode from 2020 mean that the stock is slightly overvalued. PPG’s dividend outlook is exemplary and we see many more years of dividend increases on the horizon. That said, we’d advise waiting for a pullback before buying.