Another aspect we like about this business is that approximately half of PPG’s coatings sales are related to aftermarket and maintenance coatings, which generates a stable base of cash flow each year. Producing coatings also requires relatively little capital which, when combined with PPG’s excellent margins, results in impressive free cash flow generation:
Source: Simply Safe Dividends
Finally, we like the strategic path that PPG’s management team has taken over the last decade. Coatings only accounted for 55% of PPG’s revenue in 2005. Through a mix of acquisitions, organic growth, and divestitures of non-core businesses, high-margin coatings products increased to 935 of PPG’s total sales in 2014.
PPG’s Key Risks
Over the near-term, changes in key raw material prices (e.g. titanium dioxide) can whip around PPG’s profits. The health of key end markets such as construction and automotive will also impact demand for PPG’s coatings.
However, thinking longer-term, we believe coatings will continue to be used for many years to come. While we certainly wouldn’t be the first to find out, it’s hard to imagine a new technology displacing coatings. Perhaps the bigger risk is that competitors reduce their technology gap with PPG, which begins to pressure the industry’s margins in what used to be lucrative “special-purpose” coatings.
Overall, we think the most likely risk over the next few years is a downturn in PPG’s core end markets, which it can do little to protect against.
Dividend Analysis: PPG
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. PPG’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
With a Dividend Safety Score of 99, PPG’s dividend is one of the safest in the market.
PPG Industries, Inc. (NYSE:PPG)’s earnings and free cash flow payout ratios over the last 12 months are 27% and 42%, respectively. As seen below, the company’s free cash flow payout ratio has remained stable and below 40% for most of the past decade, highlighting the consistency of PPG’s business and the healthy cash flow cushion that protects the dividend..
Source: Simply Safe Dividends
Source: Simply Safe Dividends
In addition to payout ratios, analyzing a firm’s performance during the last recession can provide further clues about its business quality and the safety of its dividend. For example, a 50% payout ratio today might appear attractive, but what if the company became unprofitable during the last recession? The dividend might not be as safe as it appears.
