Sherwin-Williams: Housing Market Driving Good Total Return And Increasing Income For 42 Years

Summary

• Sherwin-Williams has increased its dividend for 42 years (a dividend aristocrat) with a present 0.9% below average yield and has a 5-year dividend CAGR growth rate of 14%.
• Sherwin-Williams' total return over-performed the Dow average for my 64-month test period by 75.89%, which is great.
• Sherwin-Williams' three-year forward CAGR of 8% is above average and will give you good growth with the increasing need for housing upgrade products as the economy and population grow.
• Sherwin-Williams is extremely well-diversified in the home, and industrial products sector, with revenues and earnings increasing by adding bolt-on companies.

Photo by DakotaSmith/iStock Editorial via Getty Images

Sherwin-Williams (NYSE:SHW) is a buy for the total return investor and is providing an increasing dividend for 42 years. 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 2021 for an increase from 1.34/Qtr. to 1.65/Qtr. (before the 3 for one split) or a 23% increase with a yield of 0.9%. The management of SHW is good and has continued to grow the company by buying bolt-on companies and using its cash to expand existing products and develop new ones. The company is being reviewed for The Good Business Portfolio, my IRA portfolio of good business companies that are balanced among all styles of investing.

As I have said before in previous articles.

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 reviewing. For a complete set of guidelines, please see my article "The Good Business Portfolio: Update to Guidelines, March 2020". These guidelines provide me with a balanced portfolio of income, defensive, total return, and growing companies that hopefully keep me ahead of the Dow average.

The Good, Buy

The method I use to compare companies is to look first at the total return compared to the market. If a company cannot beat the market, why do you want to invest in that company? The great Sherwin-Williams total return of 160.18% compared to the Dow base of 84.29% over my 64-month test period makes Sherwin-Williams a good investment for the total return investor. Looking back five years, $10,000 invested five years ago would now be worth over $24,900 today. This gain makes Sherwin-Williams a good investment for the total return investor looking back, which has future growth with increased earnings as the COVID-19 virus is controlled by July 2021 in the United States. Overall, Sherwin-Williams is a good business with a 3-year CAGR of 8% projected growth as the United States and foreign economies grow going forward, with the increasing demand for Sherwin-Williams home and industrial products as the COVID virus gets under control worldwide in the next two years.

Sherwin-Williams is a conservative investment for the income investor who also wants good growth as the home and industrial products business is expanded. Sherwin-Williams has good cash flow at $3.4 billion/year, and the company uses some of the cash to expand its business by buying bolt-on companies, adding new stores, and increased dividends each year, increasing the value for the shareholders. A quote from the 4^th quarter earns call by the CEO John Morikis sums up the good business expansion for the past year even with the impact of the COVID pandemic.

We generated record sales despite the impacts of COVID-19. Cash from operations, net income, and net income per diluted share also were in records and increased by double-digit percentages over 2019. I'd like to call out just a few full-year highlights in more detail. Sales increased 2.6%, including a negative impact of 1.1% related to currency translation, to a record $18.4 billion. Gross margin improved 240 basis points to 47.3%. EBITDA grew to a record $3.4 billion or 18.7% of sales. Segment margin expanded in all three business groups. Adjusted diluted net income per share, which excludes acquisition-related amortization expense and other items called out in our press release, increased 16.4%

This shows the feelings of the CEO and the continued growth of the Sherwin-Williams business and shareholder return via increased earnings and dividends. Sherwin-Williams has good growth long term and will continue as the world's workforce returns after the COVID virus is controlled, growing the world economies. Sherwin-Williams's S&P CFRA's one-year price target is $253.33 (after a 3/1 split), giving you a possible gain of 2.5% in a year and making Sherwin-Williams a fair buy at this time. The projected one-year PE is high at 28, which shows that Sherwin-Williams is not cheaply valued compared with the 8% CAGR projected growth, but good growing businesses do not come cheap, and Sherwin-Williams has a business that will grow from year to year as the housing market is strong.

Sherwin-Williams is a large-cap company with a capitalization of $67 billion, well above my guideline target of at least $10 billion. Sherwin-Williams' 2021 projected cash flow at $3.4 billion is excellent, allowing the company to have the means for company growth and increased dividends. The graphic below shows the strong financial position of the company.

Source: Q4 Earnings call slides

One of the major reasons to own Sherwin-Williams is to have a steady quarterly income with good growth as the COVID virus is controlled and as workers get back to their jobs. Sherwin-Williams's revenue should increase in the United States and increase in the rest of the world as the COVID virus is controlled, but it will take 1-2 years. Sherwin-Williams has a below-average dividend yield of 0.9% and has had increases for 42 years, making Sherwin-Williams a good choice for the dividend growth investor that wants consistent growing income.

The dividend was last increased in February 2021 for an increase from $1.34/Qtr. to $1.65/Qtr. (before the 3/1 split) or a 23% increase. The five-year average payout ratio is low at 25%, which allows cash to remain for increasing the business of the company by adding new stores and increasing the dividend that provides the company growth that brings value to the stockholder.

I look for the earnings of my positions to consistently beat their quarterly estimates. For the last quarter, on January 28, 2021, Sherwin-Williams reported earnings (adjusted for 3/1 stock split) that beat expected at $1.70 by $0.08, compared to last year at $1.62. Total revenue was higher at $4.49 billion more than a year ago by 9.1% year over year and beat expected total revenue by $148 million. This was a good report with a bottom-line beating expected, and the top line increasing, and the bottom-line beating compared to last year.

The next earnings report, Q1, will be out in April 2021 and is expected to be $1.63 compared to the previous year at $1.36, a good increase. By Q3, the COVID virus should be well under control in the United States with the workforce back to normal, but the rest of the world will still be fighting COVID to keep revenues and earnings of Sherwin-Williams volatile.

One of my guidelines is would I buy the whole company if I could. The answer is yes. The total return is strong, and the slightly below-average growing dividend yield makes Sherwin-Williams a good business to own for income and growth. 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 good income stream.

Most of all, what makes Sherwin-Williams interesting is the long-term growth of their business as the worldwide need for its industrial and home products increases; Sherwin-Williams gives you an increasing dividend for the dividend investor and a great total return. The graphic below shows the strong guidance for the forward Q1 and 2021 (the per-share values are pre-split of 3/1).

Source: Q4 Earnings call slides

Risks and Negatives of the business

The obvious risk for Sherwin-Williams short term is that a new COVID virus occurs that will hurt the business short term. Sherwin-Williams has great products used worldwide, and they keep adding stores and buying bolt-on companies to their sales, but you have the risk of integrating the new companies short term. It is expected that this summer, the COVID virus will be controlled in the United States, increasing revenue, but the rest of the world will take years to control the COVID virus, so Sherwin-Williams's Revenue will continue to grow, but revenues and earnings may be erratic. There is also always the risk of government regulation and exchange rates compared to the dollar that could hurt Sherwin-Williams's business.

Conclusions

Sherwin-Williams is a great investment choice for the total return growth investor with its well-above-average total return and a good conservative investment for the dividend income investor. The Good Business Portfolio will add a starter position of 1% of the portfolio when cash is available. If you want a steady growing good total return in a growing home and industrial products business, Sherwin-Williams may be the right investment for you, and it's fairly priced with a possible 2.5% gain this year with much more to come in following years.

The total return for the Good Business Portfolio is ahead of the Dow average from 1/1/2020 to April 1 by 1.71%, which is a gain above the market gain of 8.32% for a total portfolio gain of 10.03%. Each quarter after the earnings season is over, I write an article giving a complete portfolio list and performance. The latest article is titled "The Good Business Portfolio: 2020 4^th Quarter Earnings and Performance Review."

Analyst’s Disclosure: I am/we are long BA, JNJ, HD, DHR, MO, PM, MCD, PEP, DLR, AMT, ADP, V, OHI. 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.

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.