PPG Industries: Dividends Since 1899 (& More Growth Ahead) by Arie Goren, Sure Dividend
“But that’s as boring as watching paint dry.” Paint is not known for its excitement. It is not a ‘hot’ industry like biotech or social networks.
Paint is notable for its lack of change. You may remember how Tom Sawyer tricked his friends into painting his fence white for him… That book was written in 1876.
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People are still painting their houses and (sometimes) fences to this day.
While paint my not be exciting, it can be very profitable. Long-term investors can compound their wealth over decades by investing in slow changing industries.
I’ll take boring and profitable over exciting and ‘pre-profit’ any day.
The global paint industry is rapidly consolidating. There are now 3 large names that dominate the market:
- PPG Industries (PPG)
- Sherwin Williams (SHW)
Both Sherwin Williams and PPG are Dividend Aristocrats – stocks with 25+ years of consecutive dividend increases. These companies’ long dividend histories make sense given the slow changing nature of the paint industry.
This article takes a look at the highest ranked paint business using The 8 Rules of Dividend Investing: PPG Industries.
PPG Industries: Company Overview
PPG has recorded substantial growth in the last few years. The company’s annual average sales growth over the past five years was at 6.6%; the average earnings-per-share growth was very high at 26.0%, and the average dividend growth was at 5.4%. The average annual estimated earnings-per-share growth for the next five years is also high at 9.84%.
PPG Industries is a leading diversified producer of coatings, chemicals, and glass. The company is the world’s second largest producer of paints and coatings. The company was founded in 1883 and is headquartered in Pittsburgh, Pennsylvania.
Source: Goldman Sachs Chemical Intensity Day
Latest Quarter Results Show Continued Growth
On April 21, PPG Industries reported record first-quarter 2016 financial results, which beat earnings-per-share expectations by $0.01. The company posted revenues of $3.67 billion in the quarter, missing the consensus estimate of $3.68 billion slightly.
PPG has shown earnings-per-share surprise in all its last four quarters, albeit by a small margin, as shown in the table below.
Source: Yahoo Finance
First quarter sales increased 4 percent on a constant currency basis versus the same quarter a year ago. This was led by European volume growth.
The company also saw record first quarter adjusted earnings per diluted share of $1.31, up 11 percent year-over-year despite unfavorable foreign currency translation. This was the 13th consecutive quarter of double-digit percentage growth in adjusted earnings-per-share.
PPG also repurchased $150 worth of shares in the quarter, as the company continues to return money to shareholders. This will likely continue; PPG has $1.0 billion in cash and short-term investments on its books.
In the report, Michael H. McGarry, PPG president and chief executive officer, said:
“We delivered record first quarter adjusted earnings per diluted share, which represented an 11 percent year-over-year increase, marking our 13th consecutive quarter with a double-digit percentage increase. Our record first quarter results benefited from the strong earnings leverage we achieved on sales volume gains along with acquisition-related income and continued cost discipline. We realized this improvement despite ongoing, but moderating, unfavorable foreign currency translation.”
PPG Industries has three primary business segments: Performance Coatings, Industrial Coatings, and Glass. Segment net sales and income for the first quarter of 2016 are shown in the chart below.
Source: company’s report
On its outlook, PPG expects volume growth to remain subdued as moderating European recovery and global economic growth offset incremental year-over-year demand improvement in the U.S. and Canada.
According to the company, PPG remains focused on aggressive cost actions. Cost reduction efforts are expected to yield annual savings of about $100 million by 2017.
PPG Industries’ Key Growth Drivers
I see continued high growth prospects for the company.
PPG is a global leader in the growing coating industry, and it is a leader in a range of high-growth, high-margin coatings businesses. These include architectural, aerospace, automotive OEM, automotive refinish, protective & marine, and packaging among others.
The company has been growing both organically and by acquisitions. Recently PPG acquired IVC Industrial and Cuming Microwave, as well as REVOCOAT, a global supplier of sealants, adhesives and damper products for the automotive industry.
While demand growth in the U.S. and Canada has been modest, PPG growth accelerated in Europe, where volumes have improved for five consecutive quarters.
According to the company, it anticipates further expansion of the European economic recovery, resulting in higher demand that will enable it to continue to capitalize on its ongoing actions to reduce its cost base in that region. That trend can be seen in the chart below, while almost all of the company’s sales were in the U.S. and Canada in 2006, sales to this region are expected to be less than a half in 2016.
What’s more, while the industry’s average annual growth rate has been 3% in the last ten years, PPG’s average annual growth rate has been 20%.
Source: Goldman Sachs Chemical Intensity Day
PPG is the top coatings producer in France, Poland and Denmark, and the second top producer in the United Kingdom and Belgium, as shown in the chart below.
Source: Goldman Sachs Chemical Intensity Day
Balance Sheet, Dividends, and Share Repurchase
PPG Industries has a strong balance sheet. At the end of the first quarter, the company had cash and cash equivalents of $1.03 billion and total debt of $4.26 billion, down from $4.64 billion a year earlier.
The total debt to capital ratio was at 0.45. PPG’s debt is rated A3 stable by Moody’s, A- stable by Standard & Poor’s, and A- stable by Fitch.
The company’s solid balance sheet bodes well for further cash returns to shareholders.
PPG Industries has paid uninterrupted annual dividends since 1899.
On April 21, the board of directors of PPG approved a 4-cents-per-share increase in the company’s dividend, declaring a regular quarterly dividend of 40 cents per share. PPG’s last quarterly dividend increase was 7%, in the second quarter of 2015. This marks the company’s 471st consecutive dividend payment. Frank Sklarsky, PPG executive vice president and chief financial officer, explained:
“This 11-percent increase in our per-share quarterly dividend reaffirms PPG’s commitment to sustainable dividend increases as an integral part of our capital allocation strategy.”
The forward annual dividend yield is at 1.5%, and the payout ratio is only 27.2%. The company’s recent dividend history is shown below:
Source: company’s reports *assuming same dividend rate for the year
During the quarter, the company repurchased $150 million, or about 1.5 million shares, of PPG stock, and average diluted shares outstanding were reduced by about 2% versus the prior year.
The company has approximately $770 million remaining under its current share repurchase authorization. PPG reiterated its commitment to deploy $2.0 billion to $2.5 billion of cash, in years 2015 and 2016 combined, on acquisitions and share repurchases.
PPG Industries’ Fair Valuation
Since the beginning of the year, PPG’s stock is up 9.1% while the S&P 500 Index has increased 3.3%, and the Nasdaq Composite Index has lost 0.9%.
Moreover, since the beginning of 2012, PPG’s stock has gained 158.1%, in this period, the S&P 500 Index has increased 67.9%, and the Nasdaq Composite Index has risen 90.5%.
PPG’s valuation is good (not great):
- Trailing price-to-earnings ratio is at 20.4
- Forward price-to-earnings ratio is at 15.4
- The price-to-sales ratio is at 1.9
- The price-to-cash-flow ratio is at 14.9
- The price-to-free-cash-flow is at 19.7
- The Enterprise Value/EBITDA ratio is low at 12.1
- The PEG ratio is at 1.7.
All this ads up to a high quality business with favorable growth prospects trading around fair value (if not somewhat below).
In addition, most of PPG’s Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the table below.
PPG has recorded substantial growth in the last few years, and I see continued high growth prospects for the company.
PPG is a global leader in the growing coating industry, and it is a leader in a range of high-growth, high-margin coatings businesses
The company ranks in the Top 30 high quality dividend stocks using The 8 Rules of Dividend Investing, but several Dividend Aristocrats rank higher. Click here to download a list of the Top 10 Dividend Aristocrats using The 8 Rules.
The company recently raised its dividend by 11%, it generates strong free cash flow and returns substantial capital to its shareholders by stock buybacks and dividend payments. Moreover, the company reaffirmed its commitment to sustainable dividend increases as an integral part of its capital allocation strategy.
All these factors bring me to the conclusion that PPG’s stock is a smart long-term investment.