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Down 12% from Highs, Should You Buy the Dip in This Dividend Aristocrat?
As expected, the central bank left rates unchanged this month as it continues to battle stubborn inflation. With hopes for a rate cut dwindling, and geopolitical uncertainties mounting in the background, dividend stocks can provide investors with some semblance of stability.
Dividend Aristocrats is a title reserved for those dividend stocks that have a strong track record of increasing their dividend payouts to shareholders for a minimum of 25 consecutive years. These companies also meet the requirements for membership in the benchmark S&P 500 Index ($SPX), another signal of their relative stability and financial strength.
Here, we'll highlight one Dividend Aristocrat that has pulled back from its 52-week highs - and just landed an upgrade on the strength of its compelling valuation. Should you buy this Dividend Aristocrat on the dip? Here's a closer look.
About Sherwin-Williams
Founded in 1866 by Henry Sherwin and John Williams and based out of Cleveland, Sherwin-Williams (SHW) is a leader in the paints industry. It is a leading global manufacturer, distributor, and retailer of paints, coatings, stains, varnishes, and related products. They operate through a vast network of over 4,000 stores across the globe. SHW currently commands a market cap of $76.2 billion.
SHW stock is down 2.7% on a YTD basis, and is now off nearly 13% from its 52-week highs. Longer-term, the stock's performance compares more favorably to the broad market, up about 30% over the last year.
Notably, the stock also offers a dividend yield of 0.95%, based on the current quarterly payout of $0.72 per share. Moreover, the company has been raising its dividends for the past 45 years - and with a payout ratio of just 24.16%, there's plenty of scope for further growth.
Q1 Earnings Miss Estimates
In the latest quarter, Sherwin-Williams reported a decline in revenue, even as profit rose year-over-year. Amid weakness in the housing market, the paint giant's net sales declined by 1.4% from the prior year to $5.37 billion, while EPS rose 6.4% to $2.17. The results missed consensus estimates for EPS of $2.22 on $130 million in revenue, marking a rare bottom-line miss for SHW.
Looking ahead, SHW guided for a profit of $10.85 to $11.35 per share on revenue growth in the low to mid single digits, which also failed to impress Wall Street.
That said, Sherwin-Williams exited the March quarter with a cash and equivalents balance of $179.9 million, up from $151.4 million in the year-ago period.
Further, net new stores count went up for all the three main segments. The Paints Stores Group, Consumer Brands Group and Performance Coatings Group net new stores count rose to 4,701, 320 and 323 stores compared to 4,628, 307 and 315 stores, respectively in the prior year.
Moreover, over the past 10 years, the company's revenue and EPS have expanded at CAGRs of 8.27% and 14.43%, respectively.
Competitive Advantage
As the world's leading paints and coatings company, Sherwin-Williams enjoys a significant competitive advantage due to its diverse customer base and strong brand value. The company caters to a wide range of professional, industrial, commercial, and consumer customers. Additionally, its key brands like Sherwin-Williams, Valspar, Dutch Boy, Minwax, and Thompson's WaterSeal have garnered substantial brand recognition over the years, solidifying their position in the market.
Furthermore, Sherwin-Williams' market leadership is bolstered by its controlled distribution model. This model grants the company tight control over its supply chain, pricing, and customer relationships. The extensive network of over 4,800 company-operated stores allows SHW to directly manage these crucial aspects, ensuring consistent product quality and timely customer service.
For example, the Paints Stores Group segment boasts over 3,600 sales representatives and 2,450 delivery drivers dedicated to fulfilling customer needs promptly. This robust infrastructure plays a pivotal role in Sherwin Williams' ability to consistently gain market share and maintain its industry leadership.
SHW Stock Looks Cheap
Analysts expect Sherwin-Williams to report earnings growth of 10.4% this year and 11.9% next year, on average.
Overall, analysts have deemed the stock a “Moderate Buy.” Out of 23 analysts covering the Dividend Aristocrat, 13 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, 7 have a “Hold” rating, and 1 has a “Moderate Sell” rating.
The stock's mean price target of $347.80 indicates expected upside of 14.6% from Wednesday's close.
Following the earnings report, analysts at financial services firm KeyBanc upgraded SHW stock to “Overweight,” with a price target of $400. That's based on a forecast of 30 times estimated 2025 earnings; currently, the stock trades at about 23.5x estimated 2025 earnings.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
