Dividend Aristocrats In Focus: Sherwin-Williams Sure Dividend

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Dividend Aristocrats In Focus: Sherwin-Williams


Updated on February 17th, 2021 by Bob Ciura

Sherwin-Williams (SHW) is a legendary dividend growth stock. It has increased its dividend for 42 consecutive years, putting it in very rare company when it comes to raising payouts to shareholders.

As a member of the Dividend Aristocrats, Sherwin-Williams is one of just 65 S&P 500 stocks that have raised their dividends each year for 25+ years.

We believe the Dividend Aristocrats are excellent stocks for generating steadily rising passive income over time. With this in mind, we created a list of all 65 Dividend Aristocrats.

You can download the full Dividend Aristocrats list, with important metrics like dividend yields and price-to-earnings ratios, by clicking on the link below:

 

Sherwin-Williams stands out because of its remarkable rate of dividend growth. Even better, the company shows no sign of slowing down. It has frequently increased its dividend by double-digits on a percentage basis. For 2021, the company raised its dividend by 23%.

Sherwin-Williams’ sizable dividend growth forecast makes it an appealing stock to dividend growth investors. At the same time, an elevated valuation makes the stock less attractive on a valuation basis. This article will analyze the investment prospects of Sherwin-Williams in greater detail.

Business Overview

Sherwin-Williams is the world’s second-largest manufacturer of paints and coatings. The company distributes its products through wholesalers as well as retail stores. Sherwin-Williams was founded in 1866, and has grown to a market capitalization of $57 billion on annual sales of $18 billion.

The company distributes its products through wholesalers as well as retail stores that bear the Sherwin-Williams name. Its only competitor of comparable size is fellow Dividend Aristocrat PPG Industries (PPG).

Source: Investor Presentation

Sherwin-Williams is certainly a market leader. The company has become significantly larger since its relatively recent acquisition of Valspar. The Valspar merger was transformative for Sherwin-Williams. Post-merger, Sherwin-Williams is a much more diversified company than it was prior to the Valspar purchase. Management believes it can deliver strong earnings-per-share growth, with less volatility and variability in earnings.

Even with the coronavirus pandemic severely impacting the economy, 2020 was another year of growth for Sherwin-Williams. For the 2020 fourth quarter, Sherwin-Williams generated revenue of $4.49 billion, a 9.1% increase compared to the same quarter the previous year. This result was driven by a 9.0% increase in the Americas Group, a7.3% increase in the Performance Coatings Group, and a 13.6% increase in the Consumer Brands Group. Fourth-quarter adjusted earnings-per-share totaled $5.09 compared to $4.27 in the year-ago quarter.

For the year, Sherwin-Williams generated $18.36 billion in 2020 sales, representing a 2.6% increase compared to 2019. This result was driven by a 2.1% increase in the Americas Group and a 14.1% increase in the Consumer Brands Group, which more than offset a -2.5% decline in the Performance Coatings Group. Adjusted earnings-per-share equaled $24.58 for 2020, ahead of prior guidance, and a 16.4% increase compared to 2019.

Sherwin-Williams also provided 2021 guidance, anticipating $26.40 to $27.20 in adjusted earnings-per-share for 2021. At the midpoint of guidance ($26.80 per share), the company expects adjusted EPS growth of 9% for 2021.

Growth Prospects

Sherwin-Williams has grown at strong rates over the past couple of years. The Valspar acquisition helped drive significant top line expansion, as did the strong performance of the U.S. housing market.

Looking ahead, Sherwin-Williams stands to benefit from broad-based demand for its products, especially in the international markets. Demand for Sherwin-Williams’ products is expected to grow most rapidly in the Asia-Pacific region. In addition, the company has scale unlike any of its competitors in Latin America and North America. There is still plenty of growth potential in its more mature markets, but the Valspar acquisition helped to expedite expansion into Asia-Pacific, where the company is relatively small.

The strong U.S. housing market is an additional growth catalyst. Low interest rates and rising home values are continued tailwinds for Sherwin-Williams, simply because consumers are more likely to purchase products for home renovations when the housing market is healthy.

After a significant decline in housing starts in 2020 due to the coronavirus, Sherwin-Williams noted a rapid recovery as the year progressed.

Source: Investor Presentation

Continued recovery for the U.S. economy in 2021 would be a big boost to the housing market, and Sherwin-Williams in particular.

Revenues are just one component of Sherwin-Williams’ future growth in earnings-per-share. The company generates excess cash flow, which it can use to repurchase shares each year, thereby providing a further boost to EPS.

Sherwin-Williams has plenty of opportunities to grow its sales and earnings for the foreseeable future. The company has a broad and deep portfolio of popular brands with high margins and a positive sales growth outlook.

In short, even though Sherwin-Williams is the dominant player in its sector, it still has a long runway for growth. In total, we see 7% annual earnings-per-share growth in the coming years, with about half of that accruing from a higher top line, and the balance from a combination of margin expansion and share repurchases.

Competitive Advantages & Recession Performance

Sherwin-Williams is not a recession-resistant Dividend Aristocrat. The company’s performance depends on a healthy U.S. and international housing market, which is the underlying driver of paint and coatings sales. Sherwin-Williams has a high level of leverage to construction markets as well as new buildings, which need a myriad of coating products.

But the company does have a silver lining during recessions. We believe home owners are more likely to simply repaint their house than to move completely or take on more costly repairs during a recession.

On balance, recessions negatively impact Sherwin-Williams’ earnings. This can be seen by looking at the company’s performance during the 2007-2009 financial crisis:

It took Sherwin-Williams’ earnings three full years to recover from its Great Recession lows; however, the company remained profitable and continued to raise its dividend (which is why it remains a Dividend Aristocrat today). We expect the dividend increase streak will continue during the next recession, but investors should note that its earnings, and therefore the share price, will likely see meaningful declines in a downturn.

Valuation & Expected Total Returns

Sherwin-Williams has many of the characteristics of a high-quality business, and it is valued at a premium. The stock trades with a price-to-earnings multiple of 27, based on its 2021 earnings-per-share estimate of $26.80, which compares to our estimate of fair value of 22. That implies a 4.0% annual reduction to shareholder returns in the next five years.

However, this is not a stock that is likely to sink to a low price-to-earnings ratio, given its enormously successful history of growing earnings. Investors are willing to pay more for premium growth, and Sherwin-Williams fits that description.

We expect 7% annual EPS growth for Sherwin-Williams. The stock also has a secure dividend, which yields 0.8% right now. This results in annual expected returns of just ~3.8% over the next five years.

The stock’s unfavorable valuation makes the stock overvalued. The dividend yield is still quite low, so it is not a compelling income stock either. However, the high rate of dividend growth makes the stock attractive for long-term dividend growth investors. The company’s dividend is also very safe, with a projected 2021 payout ratio of just 20%.

Final Thoughts

Sherwin Williams’ acquisition of Valspar created compelling growth opportunities for this high-quality dividend growth stock. The company should continue to grow its revenue, earnings, and dividends at a high rate over the next several years, barring a major recession.

However, the valuation is too high to warrant a buy recommendation at this time. This is a typical example of a great business trading at a not-so-great price. We think there is a lot of growth ahead along with continued dividend increases each year, but the very high valuation could negatively impact shareholder returns. We rate Sherwin-Williams a hold at this point.

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