3 Reasons This Dividend Aristocrat has a Recession-Proof Yield

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Despite the worst housing market since The Great Depression, Sherwin Williams (NYSE: SHW), the paint maker and chemicals company, increased its dividend annually throughout The Great Recession.  As a “Dividend Aristocrat,” Sherwin Williams has raised its dividend for over 25 consecutive years.  Here are three of the major reasons that Sherwin Williams has a recession-proof dividend.

*Sherwin Williams' revenue did not collapse like other companies during The Great Recession.  While Sherwin Williams is exposed to the housing market like lenders such as Bank of America and Citigroup fared much better.  Even during a recession, houses are still painted and driveways are still sealed with the products from Sherwin Williams.  There will be a drop-off in mortgages from Bank of America and Citigroup with many homes going into foreclosure, but there will be plenty of properties remaining that still require maintenance and repair work involving Sherwin Williams' goods and services. Bank of America and Citigroup have started to recover from The Recession, but neither has surged ahead like Sherwin Williams

 *As a result of its strong revenue position, Sherwin Williams has managed to keep its dividend payout ratio at a low level.  From that, Sherwin Williams can easily afford to increase its dividend without cutting into the earnings needed to expand business operations.   That allows for Sherwin Williams to both raise its dividend during lean periods yet still improve its core business needs.  As the previous chart showed, revenues for Sherwin Williams soared with the recovery from The Great Recession.  The table below reveals how low the dividend payout ratio is for Sherwin Williams compared to other Dividend Aristocrats.  For income investors seeking long term growth in the dividend, companies such as Pitney Bowes (NYSE: PBI), Sysco (NYSE: SYY), Walgreen Company, and Abbot Laboratories are not in the solid position that Sherwin Williams is to continue raising it due to its low payout ratio for a variety of factors.  

Pitney Bowes and Sysco are in the most tenuous position. For Pitney Bowes, it is due to the impact of the Internet on the retail sector.  Over the past five years, sales have fallen 4.36% for Pitney Bowes as Amazon has moved into the office supply sector.  It is difficult to see how Pitney Bowes will be able to continue to increase the size of its dividend.  Sysco is in a very competitive sector (food services) with tight margins and declining earnings-per-share growth for both the most recent quarter and the year.  That trend for Sysco is not one to support a dividend that increases every year.

Metric

Pitney Bowes

Walgreen

Sherwin Williams 

Sysco

ABT

Industry Average

Dividend Yield

12.20%

2.70%

1.00%

3.50%

1.70%

1.10%

Dividend Payout Ratio

82.09%

45.66%

27.66%

57.21%

54.00%

44.00%

             

 Source: The Motley Fools CAPS; Finviz.

*As a result of this funding of its business operations, earnings growth is very promising for Sherwin Williams.  The low dividend payout ratio of Sherwin Williams leads to a higher projected earnings-per-share (EPS) growth rate for next year and the next half-decade.  That is due to Sherwin Williams financing the expansion of its business operations and continually improving its operating model.  If its earnings were being dedicated to irresponsibly supporting a dividend, Sherwin Williams would not be expected by the analyst community to have such robust EPS growth projected for the future.

The table below shows the bullish trend for the increasing EPS of Sherwin Williams.  Due to The Great Recession, it slipped slightly for the last five years.  It has moved higher, with double digit EPS growth increased projected by the analyst community for the next five years.

Metric

Sherwin Williams

EPS Past 5 Years

(0.28%)

EPS Growth Next Year

20.06%

EPS Growth Next 5 Years

17.30%

Source: Finviz

The present yield for Sherwin Williams is only 0.96%.  But that is due to the strong stock performance, with the share price increasing almost 70% for the last year.  For long term investors seeking a dividend yield with a history of rising and a business model to support future increases, Sherwin Williams paints a very pretty picture.

 


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