Competitive Advantages & Recession Performance
The paint industry has very favorable economics. It has high margins and requires little capital investment. It generates a lot of cash. PPG clearly has a strong and durable competitive advantage in this high margin industry. It’s 4 decade (and counting) dividend streak is evidence.
PPG Industries has the highest margins in the industry of any major player. Its high margins helped the company remain profitable during the Great Recession.
– 2007 earnings-per-share of $5.03
– 2008 earnings-per-share of $3.25
– 2009 earnings-per-share of $2.03
– 2010 earnings-per-share of $4.63
– 2011 earnings-per-share of $6.87
The recession clearly did a lot of damage to PPG, as it is exposed to the real estate market. When less buildings and houses are build, less paint is sold. People also tend to hold off on doing cosmetic home repairs when money is tight.
But PPG bounced back very quickly. The company has benefited from the steady economic recovery since 2009. Over the past decade, PPG has increased earnings-per-share and dividends by 11.4% and 4.3% per year, respectively.
Valuation & Expected Total Return
PPG stock trades for a price-to-earnings ratio of 17.2. By comparison, the S&P 500 Index has a price-to-earnings ratio of 24.
The company will likely grow future earnings in the high single-digit range, so a market multiple seems appropriate. This could indicate the stock is undervalued.
PPG has a current dividend yield of 1.7%. It should be able to increase dividends at a double-digit rate going forward, in line with its 11% dividend increase in 2016. The main reasons for this are projected earnings-per-share growth, plus PPG has a low payout ratio. PPG’s forward annualized $1.60 per share dividend represents 30% of its trailing 12 month earnings-per-share. This is a modest payout ratio that leaves plenty of room for generous dividend raises.
The combination of earnings growth and the dividend yield could reach double-digit annualized returns for investors going forward.
It should be noted that PPG’s returns are ‘lumpy’. The company does not grow the same amount every year. PPG sees earnings-per-share (and typically its share price) fall significantly during recessions. When the economy isn’t in recession, PPG tends to grow quickly.
Final Thoughts
PPG Industries, Inc. (NYSE:PPG) stock has a below-average dividend yield, which may not make it a compelling buy for investors who desire current income. However, dividend growth investors (3) may view the stock more attractively.
The company is poised to grow earnings-per-share at a strong rate moving forward, as it benefits from increasing consumer demand in the U.S. and internationally.
As a result, its double-digit dividend growth rate potential makes it an appealing stock for dividend growth investors with longer investing time horizons. The company currently ranks very well using The 8 Rules of Dividend Investing thanks to its low payout ratio, reasonable valuation, and strong expected long-term return potential.
Note: This article is written by Bob Ciura and was originally published at Sure Dividend.
Additional Links:
(1) http://investor.ppg.com/press-releases/2016/07-21-2016-150214736
(2) http://investor.ppg.com/press-releases/2016/07-21-2016-115113548
(3) http://www.suredividend.com/11-reasons-to-be-a-dividend-growth-investor?utm_source=bc&utm_medium=sd&utm_campaign=101916sd2
