Dividend Analysis: Sherwin Williams Co.

It has been awhile since we have analyzed a member of the S&P 500 Dividend Aristocrat. In order to be a member of this exclusive group, a company must have raised its dividend in each of the last 25 years. That is an extraordinary feat, and one that Sherman-Williams Company (SHW) can lay claim to. It trades on the NYSE. Let’s see if it is worth adding to our portfolio of superior dividend yielding stocks.

Company Profile:

From Yahoo Finance

The Sherwin-Williams Company engages in the manufacture, distribution, and sale of paints, coatings, and related products to professional, industrial, commercial, and retail customers primarily in North and South America.

Its market capitalization is $9.0B.

Company Fundamentals:

First of all, I like to start with an analysis of management’s performance. I do this by looking at the return on invested capital (ROIC) and the return on equity (ROE).

In this case, management has delivered a solid, increasing ROIC over the last 10 years. The ROIC climbed from 10.7% in 1997 to 25.2% in 2006. And, the progression is fairly constant and steady. There are no large jumps along the way.

The ROE bears this out as the 10-year average ROE is 21.18%, and the 5-year average ROE increases to 24.86%. Last year’s ROE was 28.22%.

The equity growth rate has also been increasing steadily. The 9-year rate is 4.29%, the 5-year rate doubles to 10.09%, the 3-year rate is 13.18%, and last year’s equity growth rate was 16.48%.

its earnings per share growth rate also posted excellent results. The 9-year rate was 11.31%, the 5-year rate increases to 19.61%, the 3-year rate came in at 23%, and last year’s EPS growth rate remained steady at 23.1%.

Its sales growth rates have been a little more flat than the other growth rates. The 9-year rate is 4.97%, the 5-year rate increases to 9.79%, the 3-year rate increases to 13.47%, and last year’s rate drops back down to 8.61%.

So far, the fundamentals look good.

Dividend Fundamentals:

The current dividend yield is 1.83%. I consider that to be below average as it is lower than the dividend yield of the S&P 500 index which currently sports a dividend yield of 2.00%. It is lower than the 2.35% dividend yield available from the DJIA.

The dividend growth rate is interesting. Yes, management has increased it for the last 25 consecutive years, but the annual dividend growth rate has doubled during the last 2 years. The 9-year dividend growth rate is 9.25%, and the 5-year rate is in the ballpark at 11.32%. But in 2005 and 2006, the dividend growth rates have been 20.59%, and 21.95% respectively! This is double the normal rate that I would expect. Of course, that leads to a 3-year rate of 17.6%, and last year’s rate of 21.95%.

The dividend payout ratio has remained incredibly constant. In 1997, the payout ratio was 26.8%. Last year, the payout ratio was 23.75%. This is pretty consistent.

Cash flow growth rates have been trending upwards. The 9-year rate is 8.31%, the 5-year rate increases to 14.67%, the 3-year rate comes in at 19.17%, and last year’s cash flow growth rate was 17.71%.

Valuation Models:

Let us put a fair value on this stock using our 3 valuation models.

Let’s start with the average high dividend yield model. I consider the current 1.83% dividend yield to be below average. And, the historical dividend yield data shows this to be true. The 10-year average high dividend yield is 2.47%, and the 5-year average high dividend yield is 2.41%. If we demand the 5-year rate, then our model price works out to $52.28. At the current price of $69.01, Mr. Market is demanding a premium of 32%!

And, Mr. Graham would think we are being too generous! The Graham number works out to $38.39 which means a current premium of 79.78%!

For my discounted present value method, I used the following inputs:

A future P/E of 13.09 (the 5 year average P/E which is more conservative than today’s current P/E of 15.72).

A future EPS growth rate of 10.09% (the 5 year equity growth rate which is more conservative than the analysts’ forecast of 15%).

A dividend yield of 2.41%.

A future dividend growth rate of 11.32% (the 5 year dividend growth rate).

With these inputs, the model price works out to $53.41, and a premium of 29.22%.

Check my dividend analysis of SHW here.

Here is the 1 year stock price chart:

Conclusion:

Obviously this company has benefited from the recent housing boom. And it can be seen in the higher growth levels experienced over the last few years. But this company does have a very long history of dividend increases. Can it maintain those large dividend growth rates moving forward? More than likely not. But I also would not expect management to cut the dividend either.

Personally, I would not add this stock to my portfolio of superior dividend yielding stocks. I think that I can find better opportunities with companies that can consistently increase dividends at double digit growth rates.

Full Disclosure: I do not own shares in SHW.