Josh Kohn-Lindquist's avatar
$24.8m follower assets
One of My Favorite Dividend-Growers
I decided to check in again on one of my favorite Dividend Aristocrats in $SHW after its disappointing earnings report that saw sales rise 9%, but EPS drop 9%.

Long story short, Sherwin-Williams got punished over short-term supply chain problems, but its longer-term investment thesis remains perfectly intact.

Owning and operating a comprehensive, end-to-end supply chain, SHW thrives when things are going well macroeconomically but faces outsized pain when things turn dark (like now).

In the broader scope of things, this turbulence won't last forever. However, the houses in the US and abroad will continue aging, which helps lock SHW into high single-digit sales growth in seeming perpetuity.

With a 1% dividend, trim 30% payout ratio, 43 consecutive years of dividend increases, and a steadily declining share count, Sherwin-Williams offers market-beating returns with minimal downside.
Will Sherwin-Williams beat the S&P 500 over the next decade?
23%Who is Sherwin Williams?
21 VotesPoll ended on: 08/07/22
Tom's avatar
I've come across this name in several screeners and it fits the characteristics of a compounder. I'd be a buyer but my primary concern currently is that $SHW appears to trade like a housing market proxy and I'm not sure if that's a market I see growing very fast over the next few years. Then again, I haven't dug into this name as much as I've liked to. Do you see the company as particularly sensitive to where we are in the housing cycle?
Eric Messenger's avatar
@theglobalcapitalist those are the companies I am looking for, once the market poops on ‘em for whatever is going on this quarter.
Josh Kohn-Lindquist's avatar
@theglobalcapitalist It will naturally have a lot of ties to the broader housing market, but I am not smart enough macroeconomically to know what that means for them over shorter periods. 😂

I only know over the long haul they have navigated crazy market conditions before and are a unique consumer-facing way to gain exposure to the housing market.

I look at it all together, I guess -- more aging homes need paint, newly built homes need new paint, and actively flipped/sold homes probably will get painted. SHW should succeed in most market conditions.
Eric Messenger's avatar
Even after that drop still at a P/E of35, tough for me to imagine them being valued much above that. I’ll take $MSFT & $V first at that valuation. But I could see still adding them to the defensive performance, solid dividend core of a portfolio, like other achievers, aristocrats, & kings I love to build with like $MSFT mentioned above, others bought recently, $TGT , $AVGO , $TROW , $KLAC , & $TXN as well as possible future positions in companies like $SHW , $BLK , $NKE ,$ITW , $ORCL , $V , & $LOW.

I know I developed a little fund for myself to manage, but I believe it’s possible to have a diversity of strong companies and do well long term. I am taking the Berkshire Hathaway and Joel Greenblatt approach. I try to buy great companies that have a stable track record & are trading at attractive valuations. Then I check in often and make sure they’re still doing doing what I thought they were doing.

Owning solid younger dividend growth companies + longer term plays with 20-70 years of stable dividend growth in your portfolio was one of my original absolutes; I’ve loosened up a little now and don’t require dividends(had to buy Facebook🤣). Im not so absolute on a dividend now, but I do believe it’s about the safest thing one can invest in.

Not only do you get the long-term dividends compounding but if one buys when they’re undervalued and out of favor, at 52 week lows, they’ll do even better. Seeing the numbers that Buffett has strung together for Berkshire Hathaway when you look at the dividends + capital growth + lack of taxes because he doesn’t trade; compounding on compounding. I think solid dividends should be at least 25% of everybody’s portfolio whether retired or 20 years old. The combination of safety & potential growth is unmatched in the investment world as far as I’m aware; every study/data I’ve seen anyway.

Your pick is ALMOST a dividend king with 44 consecutive years of dividend growth


Eric Messenger's avatar
Currently at their highest historical P/E & P/S since 2012, as far back as I can see. If it’s trading near the top of its historical valuation that’s something I’m not buying into right now. Unless it’s a young fast grower. If I already held it I might continue to hold it, but I would not initiate a position at this valuation.
Josh Kohn-Lindquist's avatar
@wall_street_deebo @rpinvestments You are both right about the PE being historically high at 36, but this is on the back of declining earnings -- which shouldn't continue falling over the long term.

Should it merely get back to the $8 EPS it was at, it would be back at 30 -- of course, that's dangerous to chase, but I believe SHW's headwinds are temporary.

Consider that its gross profit margins are at all-time lows due to the supply chain pressures they are facing, and I think SHW could see a significant spike in EPS over the next 5-10 years as they gradually turn this number around and sort out their wholly-owned supply chain.
Ben's avatar
I don’t like how much they are using debt to repurchase stock at high multiples. Current PE 36 despite dropping 30% from highs.

They have repurchased 6 bil of stock at these high multiples using 3 bil in debt over last 3 years. At earnings multiples of 30-45.

And most concerning recently is how they have been using short term debt to pay off short term debt over the last 12 months. Initially short term debt was 700 mil and now is over 2 billion.

With mid single digit revenue growth, I think there are easier ways to beat the market
Josh Kohn-Lindquist's avatar
@rpinvestments Very interesting points -- hadn't tiptoed too far into the debt side of things. This is definitely worth watching over the long term, but I'm not terrified yet -- especially if FCF can reverse its recent drop, which is what led to this new debt it seems.

It appears like they're making a bit of a bet on a turnaround, taking out debt to replace FCF and keep the status quo with their share buyback program, if that makes sense.

Kind of doubling down in a way -- bit bolder than I would normally like, but shouldn't be a death knell very soon.