When building a retirement portfolio or adding to it, having proven winners is a huge asset. While past performance is no guarantee of future success, it can be a good indicator of associated risk and volatility of individual stocks. In this article, I will be reviewing Sherwin-Williams (NYSE:SHW), a stock that I believe is a strong stock to add to any retirement portfolio, even for dividend growth investors. Below are ten reasons that I believe Sherwin-Williams remains a strong long-term buy.
#1: Strong History of Double Digit Returns
Over the past decade, Sherwin-Williams has averaged annual total returns of 21.57% (with dividends reinvested). A $10,000 investment in Sherwin-Williams 10 years ago, would be worth an impressive $70,588 today. It was one of only 2 dividend champions out of 108 to see annual returns greater than 20% (Altria Group (NYSE:MO) being the other with average returns of 20.99%).
#2: Growing Dividend
Sherwin-Williams is a dividend champion with 38 consecutive years of dividend increases. Over the past ten years, its dividend has grown by an impressive 236%, with an increasing growth rate in recent years.
#3: Growing Revenue
Over the past five years, Sherwin-Williams has grown its revenue by 38.47%, which is better than several of its competitors including Dow Chemical (DOW), DuPont (DD), PPG Industries (NYSE:PPG), and RPM International (NYSE:RPM).
For its latest quarter, the company posted a 4.9% increase in revenue, beating the quarterly estimate by $90M.
#4: Steady Growth of Earnings
Over the past five years, Sherwin-Williams has seen a 149.2% increase in earnings per share. Looking at the chart below, you can see this is better than many of its competitors and you can also see that unlike the other stocks, Sherwin-Williams earnings growth has been pretty steady and consistent.
For its latest quarter, the company posted a significant increase in earnings per share from $1.38 to $1.81 compared to the same period last year.
#5: Low Payout Ratio
Sherwin-Williams currently has a payout ratio of just 24.75%. This is favorable compared to the company's peers. Dow Chemical's payout ratio is 37.07%, DuPont's payout ratio is 67.60%, PPG Industries' payout ratio is 27.11%, and RPM International's payout ratio is 43.19%.
Because of the low payout ratio, earlier in the year, Sherwin-Williams was able to increase its quarterly dividend by 25%.
#6: High ROA
Sherwin-Williams currently offers a return on assets of 17.87%. Looking at the chart below, you can see the company's ROA has increased significantly over the past five years and is well above the average ROA of its competitors.
#7: High ROE
The company's return on equity is similar to its ROA in that it has grown significantly over the past few years and is well above the ROE values of its competitors.
#8: Solid Profit Margin
Sherwin-Williams currently has a profit margin of 9.33% (trailing twelve months). This is the same profit margin as PPG Industries and is better than the profit margins of both DuPont and RPM International. Dow Chemical is the only competitor out of the four to have a better profit margin at 13.71%.
Over the past five years, Sherwin-Williams profit margin has improved by 55.85%.
#9: Upcoming Merger
In March, it was announced that Sherwin-Williams will acquire Valspar (VAL) for $11.3B. The merger is expected to close by the end of Q1 next year. I believe this merger will create even more growth opportunity for SHW and will lead to continued future success of the stock as this move will accelerate the company's international expansion.
#10: Asset Utilization
Sherwin-Williams has a high asset utilization rate that easily exceeds each of the four competitors I have mentioned throughout this article.
While these ten reasons are not the only reasons I believe Sherwin-Williams is a strong long-term buy option for investors, they do offer a good overall representation of why I believe the stock will continue to offer significant rewards to shareholders.
That isn't to say the stock is perfect; currently it's not cheap, with a trailing PE ratio of 25.41x and a significantly higher price to book value than its competitors. However, when a stock has averaged annual returns greater than 20% it is going to be difficult to find that stock on sale, and continuing to wait for that sale could leave investors out of significant price returns during that time.
Besides its current valuation, the other thing I don't like about Sherwin-Williams is its decline in book value over recent years. That said, I believe the company's overall strong financial position and impressive returns give the stock more upside potential compared to its downside risk.
As always, I suggest individual investors perform their own research before making any investment decisions.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.