The Sherwin-Williams Companies On Pace For Robust Dividend Growth

Key Points

• Sherwin-Williams reported a robust Q1 and is on track for capital returns in 2023. 
• The dividend yield isn't much, but share repurchases aid it. 
• The analysts like what they see and have begun to raise their price targets. 

The Sherwin-Williams Companies NYSE: SHW is not a high-yielding stock. Still, it is a well-known dividend grower with the capacity to maintain its double-digit distribution growth rate long into the future. Considering the stock is trading near long-term lows and showing a bottom, it is all the more appealing. The analysts are also on board and are driving the consensus price higher, which is a bonus for investors. This makes a recipe for a rally that could be sustained through the end of the year, but there is a risk. 

The risk is the outlook which remains cloudy. The takeaway is that growth remains on the table, cash flow is ample, and the dividend is safe; Sherwin Williams can weather whatever is coming. The stock may experience volatility over the next few months or quarters, but the long-term outlook is bright. Eventually, the economy will shake inflation, and the FOMC will cut rates. When that happens, Sherwin-Williams will be in an even better position than it is now. 

Sherwin-Williams Outpaces Consensus, Reaffirms Guidance 

Sherwin-Williams had a great quarter pulling in $5.44 billion in net revenue. This is up 8.9% compared to last year, beating the Marketbeat.com consensus by 580 basis points. The gain was driven primarily by price increases, but volume also played a role. On a comp store basis, sales are up 14%, with double-digit gains in all segments.

The results are mixed region-to-region, but segment sales were strong across product groups. The Performance Coating Group led with a gain of 38%, followed by a 14% increase in the Paint Stores Group and a 13% increase in the Consumer Brands Group. 

The company’s margin widened due to the pricing increases, resulting in stronger-than-expected earnings. The gross margin widened by 360 bps and was only partially offset by increased SG&A expense. SG&A increased by 240 bps to leave the EBITDA margin up 210 bps, net income up 28% and adjusted earnings up 26.7%.

On the bottom line, the $2.07 adjusted EPS beat the consensus by $0.25 but was not seen in the guidance. The company reaffirmed its guidance for the year, which may be considered cautious given the Q1 strength. 

The analyst like what they see. The Marketbeat.com consensus rating was already holding firm at Moderate Buy, and the stock is seeing positive activity following the results. Two new reports have shown up on the tracking page, including a price target increase. The new targets are above the consensus, which assumes about 9% of upside and is beginning to move higher. This is a turning point for the market; the analysts' consensus target had been lowering their targets for the past year, and that trend is over. 

Sherwin-Williams Capital Returns Are On Track 

There is 1 red flag in Sherwin-Williams' Q1 report, but it is not one to keep investors up at night. The capital returns exceeded the company’s quarterly cash flow, but mitigating factors exist. Among those are seasonality, an increase in working capital and the expectation for seasonal improvements in Q2 and Q3. The guidance for EPS of $6.79 to $7.59 implies an annualized payout ratio of 30% of the adjusted earnings. That’s not bad at all. 

The stock is showing a bottom at the $220 level that the analysts support. The post-release action has the stock down nearly 4%, but this may be an opening for a buying opportunity. If the market can regain its footing at or above the $200 level, it should continue to move sideways within its consolidation range. If not, this stock may be headed for lower price levels. The valuation is high at 27X earnings, and there are cheaper ways to get a 1% yield and share repurchases.