The last dividend increase occurred in July, when the board of directors approved a 6.70% increase in the quarterly distribution to 48 cents/share. In the past decade, this dividend champion has managed to grow its distributions at an annual rate of 5.20%/year.
The company has managed to boost earnings per share over the past decade from $2.52 in 2007 to $5.31 in 2017. PPG Industries is expected to earn $5.89/share in 2018. Earnings per share are more volatile, given the cyclical nature of the business. A large portion of PPG customers are in the housing, auto, and construction, which are exposed to the highs and lows of the economic cycle.
The company has allocated roughly 40% – 50% of free cash flow towards dividends and share repurchases over the past decade. The rest has been reinvested into the business or invested in acquisitions. I believe that strategic acquisitions can deliver future growth, as long as they are not completed at inflated prices.
After acquisitions and dispositions over the past decade, the company is now 100% focused on coatings. Approximately 60% of revenue is derived from specialty coatings, where specific types of paint are created and sold for a specific end client, which allows the company to pass through rising costs of raw materials and not compete on price. The rest of the revenues are for products where competition is based on price.
The company is also exposed to the fluctuation in commodity prices, as it may not be able to quickly pass on rising costs to customers when commodity prices increase quickly. On the other hand, cost savings initiatives can help the company in reducing its costs structure over time.
A cyclical company like PPG Industries can ride an expanding economy quite well, as volumes increase, and any excess volumes lead to higher marginal profitability that boosts earnings per share. On the other hand, when the global economy is sluggish, volumes are lower and earnings per share are depressed.
A developing story as of this writing is the stake by activist investor Nelson Peltz’s Trian in PPG Industries. This even can unlock some value for investors today, although the long-term effects on the business could not be as optimal.
Earnings per share growth has been aided by share buybacks instituted by the company. PPG Industries has managed to retire roughly a quarter of shares outstanding since 2007. Unfortunately, they didn’t start buying back stock in a more noticeable way until 2010. Share buybacks are most effective when stock prices decrease.
The dividend payout ratio has gone all over the place, characterized by rapid spikes when earnings per share fall down. Currently, the payout ratio is sustainable at 32%. Using 2018 expected earnings of $5.89/share and the new annual dividend of $1.92/share, the forward dividend payout ratio comes out to 32.60%.
Currently, the stock is attractively valued at 16.70 times forward earnings. PPG Industries yields 2%. The dividend is safe. While the P/E ratio is low, the stock may be an even better investment at lower prices from here - preferably around 15 times forward earnings.
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