Updated on September 28th, 2023 by Bob Ciura
PPG Industries (PPG) is one of the most time-tested stocks in the basic materials sector. PPG has increased its dividend for 52 consecutive years, making it a Dividend King.
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PPG Industries has maintained its long history of dividend increases thanks to its superior position in its industry. Its competitive advantages have fueled the company’s long-term growth. The company should keep increasing its dividend each year.
We also view the stock as relatively undervalued right now. This article will discuss PPG’s business model, growth potential, and valuation.
Business Overview
PPG Industries is the world’s largest paints and coatings company. Its only competitors of similar size are Sherwin–Williams and Dutch paint company Akzo Nobel.
PPG Industries was founded in 1883 as a manufacturer and distributor of glass (its name stands for Pittsburgh Plate Glass) and today has approximately 50,000 employees located in more than 70 countries at 100 locations.
The company generates annual revenue of about $18 billion.
In the 2023 second quarter, revenue grew 3.8% to $4.87 billion, which was $30 million above estimates. The Performance Coatings segment was a main driver of growth.
Source: Investor Presentation
Adjusted net income of $2.25 per share, compared to adjusted net income of $1.81 per share, in the prior year. Adjusted earnings-per-share was $0.11 above estimates. Organic growth of 4% was fueled by higher prices, while volumes fell 3% for the quarter.
For the full year, PPG expects adjusted earnings-per-share in a range of $7.28 to $7.48. The midpoint of guidance would represent 22% growth from the prior year.
Growth Prospects
PPG Industries’ earnings–per–share have achieved a growth rate of 5.8% over the last decade. We expect earnings–per–share to grow at a rate of 8% through 2028. PPG Industries’ demand dropped significantly due to the impact of COVID–19 in 2020. However, we expect the recovery from the pandemic to bring higher growth for the company over the long run.
The company expects several businesses, including automotive OEMs and aerospace, to deliver strong growth due to large supply deficits and low inventories in these end-use markets.
These trends are aided by stronger sequential automotive OEM production, further aerospace recovery, and the continuation of recent trends in the auto refinish sales as PPG works to fulfill strong backorders.
That said, PPG management believes that the ongoing recovery will span across a few years, with U.S. dealer inventories and fleet replenishment remaining at low levels.
Acquisitions are another component of the company’s future growth plan. PPG has historically used smaller, bolt-on acquisitions to complement its organic growth.
The company has made five recent acquisitions that cumulatively added $1.7 billion in annual sales and achieved ~$30 million in savings. Going forward, similar deals should provide at least a couple of percentage points in annual revenue growth.
Finally, we expect the company’s period share repurchase to aid earnings growth on a per-share basis. For context, the company has reduced its share count by 44.9% and 23.3% since 1995 and over the past decade, respectively.
Competitive Advantages & Recession Performance
PPG enjoys a number of competitive advantages. It operates in the paints and 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.
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 homeowners may be more likely to paint their houses than to move or take on more costly home renovations.
A decline in new construction is the dominant factor for PPG during a recession. However, over the course of its history, the company has shown an ability to successfully navigate recessions.
Currently, the company’s margins are threatened due to the highly inflationary and ongoing macroeconomic turmoil. However, the company has historically managed to increase prices by equal to or above inflation rates. We remain confident regarding its profitability during recessions and its ability to recover.
Valuation & Expected Returns
We expect PPG to generate earnings-per-share of $7.38 this year. As a result, the stock is currently trading at a price-to-earnings ratio of 17.7. We expect the stock’s valuation multiple to converge toward its historical average over time, at around 19.
As a result, we view PPG stock as relatively undervalued right now.
If the P/E multiple expands from 17.7 to 19 over the next five years, shareholder returns would be increased by 1.2% per year.
Dividends and earnings-per-share growth will boost shareholder returns. PPG shares currently yield 2.0%. Further, we expect 8% annual EPS growth over the next five years.
Putting it all together, PPG stock is expected to generate annual returns of 9.2% over the next five years.
Final Thoughts
PPG Industries is one of the newest additions to the Dividend Kings list, having raised its dividend for the 52nd consecutive year in 2023. The company has maintained a long history of dividend increases each year, even during recessions, despite operating in a cyclical industry that is reliant on the health of the U.S. economy.
PPG is experiencing a significant increase in raw material costs, due to inflation. Still, the company’s brand strength allows it to raise prices to keep up with increasing costs.
We believe the stock is relatively undervalued, which could extend future returns. With expected returns in the high single-digits, we rate this Dividend King a hold.
The following articles contain stocks with very long dividend histories, ripe for selection for dividend growth investors:
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~350 stocks with 10+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.