Sherwin-Williams: Buy For Great Total Return And Steady Dividend

| About: The Sherwin-Williams (SHW)

Summary

Sherwin-Williams' total return over-performed the Dow average for my 53.0-month test period by 73.11%, which is great.

Sherwin-Williams has increased its dividend for 39 years (a dividend aristocrat) with a present 0.9% below average yield; the steady slow turtle wins the race.

Sherwin-Williams' three-year forward CAGR of 17% is well above average and will give you great growth with the increasing need for housing upgrade products as the economy and population grows.

Sherwin-Williams is extremely well diversified in the home, and industrial products sector with revenues and earnings increasing by adding bolt-on companies.

This article is about Sherwin-Williams (SHW) and why it's a buy for the total return investor and providing a slowly increasing dividend. Sherwin-Williams is one of the largest home and industrial product companies in the United States and foreign countries. The dividend recently was increased in February 2018 for an increase from 0.85/Qtr to 0.86/Qtr or a 1% increase, but the total return trumps this low dividend.

Sherwin-Williams is being reviewed using The Good Business Portfolio guidelines. The company has steady growth and has cash it uses to buy bolt-on companies, increase capacity and provide cash for company expansion.

When I scanned the five-year chart, Sherwin-Williams has a good chart going up and to the right in a steady, strong slope for four of the five years, with a slight dip in 2015, a bad market year. This is the kind of chart I like, steady growth.

Chart SHW data by YCharts

Fundamentals of Sherwin-Williams will be reviewed on the following topics below.

  • The Good Business Portfolio Guidelines
  • Total Return And Yearly Dividend
  • Last Quarter's Earnings
  • Company Business
  • Takeaways
  • Recent Portfolio Changes

I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am taking a look at. For a complete set of the guidelines, please see my article "The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review". These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that hopefully keeps me ahead of the Dow average.

Good Business Portfolio Guidelines

Sherwin-Williams passes 10 of 11 Good Business Portfolio Guidelines, a good score (a good score is 10 or 11). These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below.

  1. Sherwin-Williams does not meet my dividend guideline of having dividends increase for 7 of the last ten years and having a yield of at least 1%, failing this guideline with dividend increases for the last 39 years. It has a steadily increasing dividend with a yield of 0.9%. The last year's dividend growth rate was low at 1%/year, but other years have been as high as 30%. The average five-year earnings payout ratio is low at 24%. After paying the dividend, this leaves cash remaining for investment in expanding the business and increasing the dividend.
  2. I have a capitalization guideline where the capitalization must be greater than $7 Billion. SHW easily passes that. Sherwin-Williams is a large-cap company with a capitalization of $37 Billion. The size of Sherwin-Williams, plus its cash flow of $1.9 Billion, gives it the ability to increase the business going forward and increase dividends.
  3. I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.2% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.1%. The three-year forward CAGR (S&P CFRA) of 17.0% strongly meets my requirement of 5.1% with high growth projected.
  4. My total return guideline is that total return must be greater than the Dow's total return over my test period. SHW passes this guideline with the great total return of 127.12%, more than the Dow's total return of 54.01% over my test period. Looking back five years, $10,000 invested five years ago would now be worth over $22,900 today. This great total return makes Sherwin-Williams an excellent investment for the total return investor looking back, and it has good dividend growth long term.
  5. One of my guidelines is that the S&P rating must be three stars or better. SHW's S&P CFRA rating is four stars or buy with a target price of $420, passing the guideline. SHW's price is presently 5% below the target. SHW is under the target price at present and has an average PE of 21, making SHW a fair buy at this entry point if you want a company that has a good steady growth in the housing and industrial sector.
  6. One of my guidelines is would I buy the whole company if I could. The answer is yes. The dividend stream has a low yield, but the great growth in total return makes up for the dividend being below average in a competitive business sector. The fantastic total return makes it a great company to own. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business and also generates a fair income stream. Most of all what makes SHW interesting is the steady dividend growth and the very strong total return.

Total Return And Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Sherwin-Williams' total return is very much higher compared to the Dow baseline in my 53.0-month test. I chose the 53.0-month test period (starting January 1, 2014, and ending to date) because it includes the great year of 2017, and other years that had fair and bad performance. The great total return of 127.12% makes Sherwin-Williams an excellent investment for the total return investor that also wants a steady increasing income. SHW has a below average dividend yield of 0.9% and has had increases for 39 years making SHW also a good choice for the steady dividend investor. The dividend was recently increased in February 2018 to $0.86/Qtr from $0.85/Qtr or a 1% increase.

DOW's 53.0 Month total return baseline is 54.01%

Company name

53 Month total return

The Difference from DOW baseline

Quarterly dividend percentage

Sherwin-Williams

127.12%

+73.11%

0.9%

Last Quarter's Earnings

For the last quarter on April 24, 2018, Sherwin-Williams reported earnings that beat expected by $0.41 at $3.57, compared to last year at $2.34. Total revenue was higher at $3.97 Billion more than a year ago by 43.8% year over year and beat expected revenue by $20 Million. This was a great report with bottom line beating expected and the top line is increasing and having a good increase compared with last year. The next earnings report will be out July 2018 and is expected to be $5.67 compared to last year at $4.52, a good increase.

SHW 2018 guidance is shown in the graphic below.

Source: SHW earnings call slide presentation

Business Overview

Sherwin-Williams is one of the largest providers of paint, coatings and related products in the United States and foreign countries.

As per Reuters:

The Sherwin-Williams Company (Sherwin-Williams), incorporated on July 16, 1884, is engaged in the development, manufacture, distribution, and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America with additional operations in the Caribbean region, Europe and Asia. The Company's segments are Paint Stores Group, Consumer Group, Global Finishes Group, Latin America Coatings Group and Administrative.

Paint Stores Group

As of December 31, 2016, the Paint Stores Group consisted of 4,180 company-operated specialty paint stores in the United States, Canada, Puerto Rico, Virgin Islands, Grenada, Trinidad and Tobago, St. Maarten, Jamaica, Curacao, Aruba, St. Lucia and Barbados. Each store in this segment is engaged in the related business activity of selling paint, coatings and related products to end-use customers. The Paint Stores Group markets and sells Sherwin-Williams branded architectural paint and coatings, protective and marine products, original equipment manufacturer (OEM) product finishes and related items. These products are produced by manufacturing facilities in the Consumer Group. In addition, each store sells select purchased associated products. Its trademarks and trade names include ProMar, SuperPaint, A-100, Duron, MAB, PrepRite, Duration, Duration Home, Harmony, ProClassic, Woodscapes, SuperDeck, Cashmere, HGTV HOME by Sherwin-Williams, Emerald, Duracraft, Solo, ProIndustrial, ProPark, Frazee, Parker Paints, Kwal, Color Wheel, General Paint and Paint Shield."

Overall, Sherwin-Williams is a great business with 17% CAGR projected growth as the worldwide economy grows going forward with the increasing need for more paint, coatings, and related products. The good earnings and revenue growth provides SHW the capability to continue its growth as the housing and industrial market increases.

The Fed has kept interest rates low for some years, and, on March 21, they raised the base rate up 0.25%, which was expected. I believe that they will not raise the rates three more times this year but will go slow at 1-2 for the rest of 2018, which should help keep the economy on a growth path. If infrastructure spending can be increased, this will even increase the United States' growth going forward with better economics for the consumer. The recent market volatility may slow down the Fed.

From April 24, 2017, earnings call, John Morikis (Chief Executive Officer and President) said,

Despite a slow start to the painting season in certain regions of North America, we delivered strong results in our first quarter. Sales, gross profit, net income and diluted earnings per share were all first quarter records for the company. We are seeing continued strong demand across most businesses, and we're making good progress on the Valspar integration, value capture and pricing initiatives to offset raw material inflation.

If you back out the contribution from Valspar, our core consolidated sales grew by nearly 5% compared to first quarter 2017, with a little more than half coming from volume, consolidated gross profit dollars increased by nearly $40 million in the quarter. The core gross margin declined 93 basis points year-over-year to 47.8%. SG&A as a percent of sales decreased 121 basis points, and core consolidated profit before tax increased 7.2% and expanded 25 basis points as a percent of sales.

Core diluted earnings per share, again, excluding Valspar results and acquisition costs, increased 10.7% to $2.89 compared to the same quarter last year. The Valspar business had a little more than $1 billion in net sales and $0.68 to earnings per share in the quarter. Consolidated first quarter 2018 EPS, excluding acquisition expenses, increased 36.8% year-over-year to $3.57 per share. The Americas Group grew volumes and improved their operating performance compared to the first quarter last year, although growth was at the lower end of our expectations due to slow exterior paint sales in some regions for most of the quarter.

Sales to residential repaint contractors in the U.S. and Canada grew at a double-digit pace for the 16th time in the last 18 quarters. Protective and marine coatings sales in the U.S. and Canada grew in the high single digits. And property management, new residential, commercial and DIY segments all contributed to TAG's growth in the quarter. Latin America sales in total increased by 9.5%. It appears that the fundamental demand and trends remain strong across the business."

This shows the feelings of top management for the continued growth of the Sherwin-Williams business and shareholder return with an increase in future growth. SHW has good constant growth and will continue as the world economy grows.

Sherwin-Williams has a large, diverse group of products as seen in the graphic below.

Source: SHW earnings call slide presentation

Takeaways

Sherwin-Williams is a good investment choice for the steady dividend investor with its slightly below average dividend yield with 39 years of dividend growth and an excellent choice for the total return investor. Sherwin-Williams will be considered for The Good Business Portfolio. If you want steady growing dividend income and great total return in the housing and industrial business, SHW may be the right investment for you.

Recent Portfolio Changes

I was considering selling the small position in Kraft Heinz Corp. (KHC) that is 0.5% of the portfolio because of its bad performance, and I have better companies for investment. The last earnings showed growth, so I will wait another quarter to see if this continues while I sell covered calls against the position.

  • On June 8th, sold KHC July 57.5 calls against the position and will make 4% if the KHC price remains the same.
  • On May 14th, I trimmed the position of Eaton Vance Enhanced Equity Income Fund II (EOS) from 9.2% of the portfolio to 8.9%. I still like EOS and don't want to overweight this fund which is high in technology companies.
  • On March 29, increased position of American Tower (AMT) to 0.8% of the portfolio, I will continue adding to this position as cash is available.
  • On March 29, sold entire position of L Brands (LB), it does not look good for the company going forward.
  • On March 23, increased position of Freeport-McMoRan (FCX) to 2.4% of the portfolio and will add to this position as cash is available.
  • On March 20, increased position of Freeport-McMoRan to 2.2% of the portfolio and will add to this position as cash is available.
  • On March 16, increased position of Digital Reality Trust (DLR) to 2.4% of the portfolio. I want to get this company to a full position of 4%.
  • On March 1, increased position in AMT to 0.9% of the portfolio and will continue to add when cash is available.

The Good Business Portfolio trims a position when it gets above 8% of the portfolio. The four top companies in The Good Business Portfolio are, Johnson & Johnson (JNJ) is 7.5% of the portfolio, Altria (MO) is 6.8% of the portfolio, Home Depot (HD) is 9.8% of the portfolio and Boeing (NYSE:BA) is 14.1% of the portfolio, therefore BA and Home Depot are now in trim position with Altria and JNJ getting close.

Boeing is going to be pressed to 14% of the portfolio because of it being cash positive on 787 deferred plane costs at $316 Million in the first quarter of 2017, an increase from the fourth quarter. The second quarter saw deferred costs on the 787 go down $530 Million a big jump from the first quarter. The second quarter of 2017 earnings was fantastic with Boeing beating the estimate by $0.25 at $2.55. The third quarter of 2017 earnings were $2.72 beating the expected by$0.06 with revenue increasing 1.7% year over year another good report. The first quarter earnings for 2018 were unbelievable at $3.64 compared to expected at $2.64. I just can't bring myself to sell any more Boeing.

JNJ will be pressed to 9% of the portfolio because it's so defensive in this post-BREXIT world. Earnings in the last quarter beat on the top and bottom line, and Mr. Market did not like it. JNJ has announced a dividend increase to $0.90/Qtr which is 56 years in a row of increases. JNJ is not a trading stock but a hold forever; it is now a strong buy as the healthcare sector remains under pressure. Take this recent drop to pick up a great company in the medical products field.

For the total Good Business Portfolio, please see my article on The Good Business Portfolio: 2018 1st Quarter Earnings and Performance Review for the complete portfolio list and performance. Become a real-time follower, and you will get each quarter's performance after the next earnings season is over.

I have written individual articles on JNJ, EOS, GE, IR, MO, BA, PEP, AMT, PM, LB, Omega Health Investors, Digital Investors Trust (DLR) and Automatic Data Processing (ADP) that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest, please look for them on my list of previous articles.

Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions of the companies are my own.

Disclosure: I am/we are long BA, JNJ, HD, OHI, MO, IR, DLR, GE, PM, LB, MMM, ADP.

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.