Dividend Aristocrats In Focus: Sherwin-Williams

Updated on February 5th, 2023 by Felix Matinez

Sherwin-Williams (SHW) is a legendary dividend growth stock. It has increased its dividend for 44 consecutive years, putting it in a very rare company when it comes to raising payouts to shareholders.

As a member of the Dividend Aristocrats, Sherwin-Williams is one of just 66 S&P 500 stocks that have raised their dividends each year for 25+ years.

We believe the Dividend Aristocrats are excellent stocks for generating steadily rising passive income over time. With this in mind, we created a list of all 68 Dividend Aristocrats.

You can download the full Dividend Aristocrats list, with important metrics like dividend yields and price-to-earnings ratios, by clicking on the link below:

Sherwin-Williams stands out because of its remarkable rate of dividend growth. Even better, the company shows no sign of slowing down. It has frequently increased its dividend by double-digits on a percentage basis. However, for 2022, the company raised its dividend by 9.1%.

Sherwin-Williams’ sizable dividend growth forecast makes it an appealing stock to dividend growth investors. At the same time, an elevated valuation makes the stock less attractive on a valuation basis.

This article will analyze the investment prospects of Sherwin-Williams in greater detail.

Business Overview

Sherwin-Williams is the world’s second-largest manufacturer of paints and coatings. The company distributes its products through wholesalers as well as retail stores. Sherwin-Williams was founded in 1866 and has grown to a market capitalization of $62.3 billion on annual sales above $22.1 billion.

The company distributes its products through wholesalers and retail stores with the Sherwin-Williams name. Its only competitor of comparable size is fellow Dividend Aristocrat PPG Industries (PPG).

Source: Investor Presentation

Sherwin-Williams is certainly a market leader. The company became significantly larger after its acquisition of Valspar. The Valspar merger was transformative for Sherwin-Williams.

Post-merger, Sherwin-Williams is a much more diversified company than it was prior to the Valspar purchase. Management believes it can deliver strong earnings-per-share growth with less volatility and variability in earnings.

This proved true in 2021 and 2022, a year of recovery for both Sherwin-Williams and the U.S. economy. On January 26th, 2023, Sherwin–Williams released Q4 2022 results. For the quarter, Sherwin–Williams generated revenue of $5.230 billion, a 9.8% increase compared to Q4 2021.

Revenue in the Performance Coatings group rose 4.2%, but was heavily offset by a 13.8% decline in the Consumer Brands Group, but a 15.7% increase in the Americas Group. Adjusted earnings–per–share equaled $1.89 versus $1.34 in Q4 2021.

Sherwin–Williams also updated its 2023 guidance. The company anticipates a down mid-single-digit percentage to flat net sales for 2023 and $7.95 to $8.65 in adjusted earnings–per–share.

Growth Prospects

Sherwin-Williams has grown at strong rates over the past couple of years. The Valspar acquisition helped drive significant top-line expansion, as did the strong performance of the U.S. housing market.

Looking ahead, Sherwin-Williams stands to benefit from broad-based demand for its products, especially in the international markets. Demand for Sherwin-Williams products is expected to grow most rapidly in the Asia-Pacific region.

In addition, the company has a scale unlike any of its competitors in Latin America and North America. There is still plenty of growth potential in its more mature markets, but the Valspar acquisition helped to expedite expansion into Asia-Pacific, where the company is relatively small.

The strong U.S. housing market is an additional growth catalyst. Low unemployment and rising home values are continued tailwinds for Sherwin-Williams, although a rising interest rate cycle could put a dent in the company’s growth.

Still, management is optimistic about the company’s future outlook, as industry fundamentals remain supportive of growth.

Source: Investor Presentation

Continued recovery for the U.S. economy in 2023 would boost the housing market, particularly Sherwin-Williams.

Revenues are just one component of Sherwin-Williams’ future growth in earnings-per-share. The company generates excess cash flow, which it can use to repurchase shares each year, thereby boosting EPS.

Sherwin-Williams has plenty of opportunities to grow its sales and earnings for the foreseeable future. The company has a broad and deep portfolio of popular brands with high margins and a positive sales growth outlook.

In short, even though Sherwin-Williams is the dominant player in its sector, it still has a long runway for growth. Overall, we expect 9% annual earnings-per-share growth in the next five years.

Competitive Advantages & Recession Performance

Sherwin-Williams is not a recession-resistant Dividend Aristocrat. The company’s performance depends on a healthy U.S. and international housing market, which is the underlying driver of paint and coatings sales.

Sherwin-Williams has a high level of leverage to construction markets as well as new buildings, which need a myriad of coating products.

Related: See our favorite construction stocks analyzed in detail.

But the company does have a silver lining during recessions. We believe homeowners are more likely to repaint their houses than to move completely or take on more costly repairs during a recession.

On balance, recessions negatively impact Sherwin-Williams’ earnings. This can be seen by looking at the company’s performance during the 2007-2009 financial crisis:

2007 adjusted earnings-per-share: $4.70
2008 adjusted earnings-per-share: $4.00 (15% decline)
2009 adjusted earnings-per-share: $3.78 (5.5% decline)
2010 adjusted earnings-per-share: $4.21 (11% increase)

It took Sherwin-Williams’ earnings three full years to recover from its Great Recession lows; however, the company remained profitable and continued to raise its dividend (which is why it remains a Dividend Aristocrat today).

We expect the dividend increase streak will continue during the next recession, but investors should note that its earnings, and therefore the share price, will likely see meaningful declines in a downturn.

Valuation & Expected Total Returns

Sherwin-Williams has many of the characteristics of a high-quality business, and it is valued at a premium. The stock trades with a price-to-earnings multiple of 28.6, based on its 2023 earnings-per-share estimate of $8.30, which compares to our estimate of fair value of 23.

That implies a ~3.5% annual reduction to shareholder returns in the next five years.

However, this is not a stock that is likely to sink to a low price-to-earnings ratio, given its enormously successful history of growing earnings. Investors are willing to pay more for premium growth, and Sherwin-Williams fits that description.

We expect 9% annual EPS growth for Sherwin-Williams. The stock also has a secure dividend, which yields 0.9% right now. This results in annual expected returns of just ~6.4% over the next five years.

The unfavorable valuation makes the stock overvalued. The dividend yield is still relatively low, which is not a compelling reason to buy the stock either.

However, the high dividend growth rate makes the stock attractive for long-term investors. The company’s dividend is also very safe, with a projected 2023 payout ratio of just 28%.

Final Thoughts

Sherwin Williams’ acquisition of Valspar created compelling growth opportunities for this high-quality dividend growth stock. The company should continue to grow its revenue, earnings, and dividends at a high rate over the next several years, barring a major recession.

However, the valuation is too high to warrant a buy recommendation at this time. This is a typical example of a great business trading at a not-so-great price.

We think there is a lot of growth ahead along with continued dividend increases each year, but the very high valuation could negatively impact shareholder returns. We rate Sherwin-Williams a sell on valuation.

Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:

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