When it comes to boring stocks, there may not be any stock more boring than Sherwin-Williams Co (NYSE: SHW). It is a 150-year-old company that makes paint. That’s right. Who knew that just making paint could be as profitable as it has been for Sherwin-Williams stock? In fact, it is so profitable that SHW stock is a 20-bagger since 1998 alone. And it’s also a dividend aristocrat.
How important is SHW in terms of paints and coatings? It is the world’s second-largest manufacturer. Paints and coatings are products that are always in some form of demand. Believe it or not, they’re very similar to the demand for fast food. When the economy is bad, demand is okay. When the economy is good, demand is exceptional.
So here we are in a period of strong economic growth, and the company’s results should continue to reflect that. It’s also worth noting that home-improvement stocks like Home Depot Inc (NYSE: HD) and Lowe’s Companies, Inc. (NYSE:LOW) have been seeing terrific same-store sales, which bodes well for Sherman-Williams stock.
In fact, Lowe’s expanded its partnership with Sherwin-Williams. It will become the only nationwide home improvement chain offering the top staining brands, as well as the top paintbrush brand, as well as the top spray paint. All of these are SHW products.
As is the case with many global companies, the Asia-Pacific region is likely to provide the strongest growth going forward. SHW projects between 5% and 7% growth in that region. The rest of the world is expected to see 2% to 3% growth. It is the 2016 acquisition of Valspar that is helping Sherwin-Williams expand into the Asia-Pacific and emerging markets.
There are also additional cost synergies that came as a result of the Valspar acquisition. The company expects somewhere around $400 million in annual cost synergies. It’s hard to believe, but Sherwin-Williams stock has benefited from the fact that earnings per share have been compounding at a 14% annual rate over the past 14 years. While that growth is going to slow to something like 8% or 9%, that still puts the company solidly within Peter Lynch stalwart territory.
Necessary Moves for Sherwin-Williams Stock
With a large acquisition comes necessary financial hiccups. Sherwin-Williams has been repurchasing a lot of stock over the past few years, and substantially raising its dividend from year to year.
In the near term, the company will be using its robust cash flow to pay down debt, rather than focus on buybacks and dividends. It’s a prudent move after a large acquisition. Too many companies think they can just proceed with business as usual, throwing money at share buybacks, instead of reducing debt.
It’s also a necessary maneuver. The company never carried a whole lot of debt in the first place, but it took on well over $8 billion of it to complete the acquisition. Long-term debt now stands just a little below $10 billion. Free cash flow has traditionally been between $1.2 billion and $1.6 billion with about $300 million being earmarked for the dividend.
Bottom Line on Sherwin-Williams Stock
Sherwin-Williams stock is pricey compared to its average valuation. Over the past decade, its average price-earnings ratio has been about 20. Today, it’s closer to 25.
I don’t think there’s any need to go rushing into this stock. The dividend payout is very nice, but not very high on a percentage basis. There are probably other dividend aristocrats that might be a better use of your money at this time, but keep an eye on Sherwin-Williams stock should it fall significantly.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
