Sherwin-Williams Dividend – Slowing or Growing?

By Chad Henage - June 22, 2012 | Tickers: DD, PPG, SHW | 0 Comments

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When most people hear the name Sherwin-Williams (NYSE: SHW) they think paint. However, if you've bought stock in Sherwin-Williams in the last six months, your first thought has to be profits. The stock has jumped from about $85 to nearly $132 as of this writing. That's an increase of over 55% in a very short time. Fellow Fool Sean Williams, recently called out the company as one stock near a 52-week high to sell. His point was two-fold. First, that some of Sherwin-Williams costs were rising which could hurt margins. Second, he was concerned that the company's growth is based on buying and remodeling homes, which isn't exactly a great market. While these are valid points, Sherwin-Williams has something going for it that other chemical and paint companies don't. Namely the company is one of the few remaining dividend aristocrats. However, we've learned in the last few years, that dividend streaks can be broken. Is Sherwin-Williams the next dividend blowup, or will it maintain its aristocrat status?

Looking at the company first, we know from Sean's article that there are concerns about a run up in the stock price. This begs the question, is the stock overvalued relative to its peers? Let's look at Sherwin-Williams compared to two of its competitors, to see how the company is doing:

You can clearly see the market thinks highly of Sherwin-Williams. The stock's high expected growth rate I'm sure has something to do with this, but investors could also be looking at the company's superior free cash flow as a reason to bid up the stock. Clearly Sherwin-Williams is going to have to perform well to live up to its high P/E ratio. We know the company is well known for its dividends, can the company afford its current payout?

In the last three years, the company's free cash flow payout ratio has been between 21% and 27%. One issue I've noticed is, in the last three years, the company's operating cash flow has actually decreased a total of 14.34%. However, with a current payout ratio below 27%, the company's dividend is not in any danger at this point. What about dividend growth?

In the last several years, there is no question that the company's dividend growth has slowed down. Look at the following chart and you can see what I mean:

You can see that from 2002 to 2007 the company increased its dividend growth in impressive fashion. However, in the last five years the company's dividend growth has averaged just over 4%. So what should investors expect going forward?

With analysts expecting over 16% EPS growth, it seems like investors should expect better dividend growth in the next several years versus the last few. With a payout ratio of under 27%, it seems reasonable to expect 15%+ dividend growth in the next few years. While I understand the concerns Sean voiced, that this is a cyclical industry and not a revolutionary product, homeowners of all stripes are going to need paint. The fact that the housing industry isn't great, really is a positive for Sherwin-Williams. As an investor in the company, you have to think of housing a little differently than an investor in say a homebuilder.

An investor in a homebuilder hopes for an improvement in home sales, which would lead to better new home sales. An investor in a company like Sherwin-Williams wants homes to change hands whether it's new sales, or even foreclosures. When homes change hands, one of the first projects most people take on is to repaint. This is the case whether the home is foreclosed on and the bank has to have the home painted, or whether it's a traditional sale where a new buyer repaints the home. Coming out of one of the worst times in housing in decades, it only makes sense that housing sales will eventually improve. As one of the strongest name brands in paint, Sherwin-Williams stands to benefit. That being said, the stock is priced a little rich. I would wait for one of the inevitable 5-10% drops in the market to acquire Sherwin-Williams shares.

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