Looking the cyclicality of SHW’s business, we can see that sales growth has remained within a relatively tight band over the last decade. SHW’s revenue fell by just 11% during the financial crisis, and its free cash flow per share actually grew. The company’s stock outperformed the S&P 500 by over 40% in 2008, too. Despite its exposure to the housing market, SHW’s business held up fairly well because homeowners continued to use paint for affordable redecorating projects and the company had numerous opportunities to plant new store locations.
Source: Simply Safe Dividends
Despite selling a commodity (paint), SHW’s strong branding, vertical integration, and economies of scale have enabled it to generate outstanding returns on invested capital over the last decade. High returns create economic value and help the company compound its earnings faster by squeezing more out of every dollar of capital reinvested back into the business.
Source: Simply Safe Dividends
SHW’s balance sheet looks alright. Its cash balance is lower than we like to see at $206 million compared to debt of $1.9 billion and dividend payments last year of $215 million, but the company’s dependable free cash flow generation helps alleviate these concerns.
Source: Simply Safe Dividends
Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
SHW’s dividend growth prospects are excellent – the company has a Dividend Growth Score of 97. The company is a dividend aristocrat that recorded its 37th consecutive dividend increase in 2015, and SHW plans on hiking the annual dividend by 25% in 2016.
As seen below, SHW’s dividend growth rate has accelerated over the last decade, increasing from 12.6% per year over its last 10 fiscal years to about 20% per year over the last three years. We anticipate double-digit dividend growth continuing for many years given SHW’s strong underlying earnings growth and its low payout ratios.
Source: Simply Safe Dividends
Valuation
Sherwin-Williams Co (NYSE:SHW) trades at 20x forward earnings and has a dividend yield of 1.1%, which is in line with its five year average yield. Investors clearly believe SHW has compelling long-term earnings growth prospects by assigning this paint producer a 20x multiple.
We like the business and believe it is very durable, but we are less sure of management’s long-term store growth expectations. If SHW runs into market saturation sooner than expected in the U.S. and moderates its store expansion pace, things could get ugly as the stock re-rates to account for less growth.
For now, we will remain on the sidelines and look to revisit the stock closer to $215 per share. To deliver an exceptional total return, SHW needs to continue growing earnings close to 10% per year.
While such growth is certainly possible and the company has proven many wrong over the last decade, we believe that SHW’s high earnings multiple leaves less margin of safety.
Conclusion
SHW is a blue chip dividend stock with a bright future and strong staying power. However, even the best businesses can make poor investments depending on the market’s implied expectations.
For now, we believe there are other more attractive dividend stocks that offer a higher initial yield, above average growth prospects, and somewhat lower expectations. We will keep watching SHW for a better price.
Disclosure: None
