Dividend Aristocrats In Focus Part 8: Sherwin-Williams Co (SHW)

Valuation & Expected Total Return

Sherwin-Williams stock trades for a price-to-earnings ratio of 24. This is right on par with the average S&P 500 price-to-earnings ratio. Given Sherwin-Williams’ strong rate of earnings growth over the past several years, the stock could be viewed as undervalued in today’s low interest rate environment. As the saying goes, premium companies can command premium valuations.

With that said, the company is trading far above its historical price-to-earnings ratio (as is much of the market).

Sherwin-Williams price-to-earnings ratio traded in the teens for much of the last decade. The market has only recently (in the last 3 years or so) come to appreciate Sherwin-Williams as a high quality business – with a resulting increase in its price-to-earnings ratio.

Sherwin-Williams investors will earn a significant portion of future returns from dividends and dividend growth. Over the past five years, Sherwin-Williams has increased its dividend by 18% compounded annually. The company currently has a low payout ratio of just 25%. Investors should expect dividend growth ahead of expected 8% to 12% earnings-per-share growth going forward.

Sherwin-Williams investors should expect total returns of around 9% to 13% a year before changes in the valuation multiple based on its expected earnings-per-share growth and current dividend yield of 1.2%.

Final Thoughts

Sherwin-Williams Co (NYSE:SHW) has several traits that should be highly sought after for dividend investors. The company has a strong position in its industry, generates high profit margins, and has a long runway of growth ahead, particularly in new geographic markets. It also has a shareholder-friendly management team committed to growing dividends over time.

The only downside for the stock is that it has a low current yield of 1.2%. This is significantly below the average dividend yield in the S&P 500 Index of 2%. As a result, Sherwin-Williams stock may not appeal to investors wanting high levels of current income.

That being said, as a Dividend Aristocrat with double-digit annual dividend growth potential, Sherwin-Williams stock is an attractive stock to hold for dividend growth investors. The company ranks well using The 8 Rules of Dividend Investing (3) due to its growth potential and low payout ratio. Dividend Aristocrat and coatings peer PPG Industries, Inc. (NYSE:PPG) ranks above Sherwin-Williams at current prices, however.

Note: This article is written by Bob Ciura and originally published at Sure Dividend.