Looking for a steady grower, tied to the housing market, that’s expanding into the red-hot economy of Mexico? Look no further than Sherwin-Williams (NYSE:SHW).
The company is widely known as the nation’s largest producer of paints and coatings. But even setting aside its 4,000 retail shops nationwide, the growth story is strong. Sherwin-Williams also sells a wide range of protective finishes for applications in the marine, automotive, architectural and aerospace industries. And considering that U.S. auto production and jet deliveries are on the rise, Sherwin-Williams should profit even outside of the housing market.
SHW is a great long-term play for 2013 because it resists market shocks like a champion. The housing bust barely fazed this stock compared with its competitors: From 2007 and 2009, SHW gave up 12% while PPG Industries (NYSE:PPG) dropped 35% and DuPont (NYSE:DD) plunged 47%. And while I don’t expect a repeat of 2007, I bet we’re in for some rough waters. As investors adjust to changes wrought by the hastily signed fiscal cliff resolution, we’ll need to stick with stocks that can rise above choppy trading activity.
Now, why does SHW consistently outperform the market? One reason that shareholders are so loyal is that Sherwin-Williams takes care of them through a reliable and juicy dividend (the sixth-highest in its industry) and hefty stock buybacks. The company bought back 500,000 shares of its stock in the third quarter; it has more than 17 million shares left on its ongoing share repurchase program. Meanwhile, Sherwin-Williams has hiked its dividend by 160% over the past 10 years and shows no sign of stopping this trend. As a shareholder, next year you’ll most likely see dividend payments in March, June, September and November.
Above all else, now is the time to buy Sherwin-Williams because raw material prices are finally falling, while demand for paint and coatings is on the rise thanks to a stronger U.S. housing market. And as I mentioned earlier, the company’s industrial finishes business is on the up as U.S. factories churn out more cars and jets.
This upswing was evident in the company’s strong third-quarter earnings announcement in October. Sherwin-Williams brought in a record $2.6 billion in net sales (5% higher than the year-ago quarter) thanks to higher traffic at its paint stores. Over the same period, net income jumped 31% to $234.9 million, or $2.24 per share. Analysts forecast earnings of $2.20 per share, so Sherwin-Williams posted a 2% earnings surprise.
And recently, the company lived up to its slogan “Cover the Earth” by buying out Comex Group, the fourth-largest paint maker in North America. What’s special about Comex is that this company has exclusive selling rights to thousands of paint stores across Mexico. With existing home sales and housing starts on the rise in Mexico, the market for paint sales is heating up, and now Sherwin-Williams will get a piece of the action through Comex. The Comex acquisition will also give Sherwin-Williams added reach in Canada.
So it’s no wonder that analysts forecast 7% sales growth and nearly 20% earnings growth for 2013 … as the rest of the General Building Materials sector is headed towards a 1.4% drop in earnings. This kind of consistent outperformance is one of many reasons why I consider SHW to be the top stock for 2013.