Dividend Kings In Focus: PPG Industries

Up to date on October tenth, 2022 by Nikolaos Sismanis

PPG Industries (PPG) is among the most up-to-date additions to the Dividend Kings record.

The Dividend Kings have raised their dividend payouts for a minimum of 50 consecutive years. You may see all 45 Dividend Kings right here.

You may obtain the total record of Dividend Kings, plus necessary monetary metrics similar to dividend yields and price-to-earnings ratios, by clicking on the hyperlink under:

PPG has maintained its lengthy historical past of dividend will increase because of its superior place in its trade. Its aggressive benefits have fueled the corporate’s long-term development.

As we see the potential for continued development in PPG’s core markets, the corporate ought to maintain growing its dividend every year.

We additionally view the inventory as comparatively undervalued proper now.

This text will focus on PPG’s enterprise mannequin, development potential, and valuation.

Enterprise Overview

PPG Industries is the world’s largest paints and coatings firm. Its solely opponents of comparable measurement are Sherwin–Williams and Dutch paint firm Akzo Nobel.

PPG Industries was based in 1883 as a producer and distributor of glass (its title stands for Pittsburgh Plate Glass) and immediately has roughly 50,000 workers situated in greater than 70 nations at 100 areas.

The corporate generates annual income of about $17 billion.

PPG Industries introduced second-quarter outcomes on July twenty first, 2022. Income grew 7.8% to a quarterly file of $4.7 billion, beating expectations by $40 million.

Natural development was 8% for the quarter, as a 12% contribution from greater promoting costs and 4% from acquisitions have been solely partially set by a 4% decline in quantity and a 4% headwind from foreign money translation.

You may see a breakdown of the corporate’s quarterly gross sales efficiency within the picture under:

Supply: Investor Presentation

Adjusted internet earnings was $430 million, or $1.81 per share, in comparison with adjusted internet earnings of $465 million, or $1.94 per share, within the prior yr. Adjusted earnings-per-share additionally beat estimates by $0.09.

Efficiency coatings’ revenues grew 7% to $2.93 billion. Larger promoting costs (+11%) and advantages from acquisitions (+4%) greater than offset international foreign money translation (-4%) and a decline in volumes (-4%).

Automotive refinish grew excessive low teens-percentage and aerospace volumes improved by 10%. Lastly, industrial coatings elevated by 9% to $1.76 billion.

Quantity (-3%) and foreign money translation have been as soon as once more headwinds (-5%), however promoting costs (+14%) and acquisition-related gross sales (+3%) greater than offset these weak areas. Pricing greater than offsets decrease quantity for automotive OEMs, which continues to be restricted because of the restricted availability of semiconductor chips.

Wanting forward, PPG Industries expects combination gross sales volumes flat to down a low-single-digit proportion in its outcomes. The corporate is predicted to ship adjusted EPS of roughly $6.68 for fiscal 2022, comparatively flat year-over-year. 

Development Prospects

PPG Industries’ earnings–per–share have achieved a development fee of 5.8% during the last decade. We count on earnings–per–share to develop at a fee of 8% by means of 2027. 

PPG Industries’ demand dropped considerably due to the affect of COVID–19 in 2020. However, we count on the restoration from the pandemic to supply the next fee of development for the corporate.

The corporate expects a number of companies, together with automotive OEMs and aerospace, to ship robust development as a consequence of giant provide deficits and low inventories in these end-use markets.

Supply: Investor Presentation

Because the above picture exhibits, optimistic demand traits are typically anticipated to proceed in North America.

These traits are aided by stronger sequential automotive OEM manufacturing, additional aerospace restoration, and the continuation of latest traits within the auto refinish gross sales as PPG works to satisfy robust backorders.

That mentioned, PPG administration believes that the continued restoration will span throughout a number of years, with U.S. seller inventories and fleet replenishment remaining at low ranges.

Acquisitions are one other element of the corporate’s future development plan. PPG has traditionally used smaller, bolt-on acquisitions to enrich its natural development.

The corporate has made 5 latest acquisitions that cumulatively added $1.7 billion in annual gross sales and achieved ~$30 million in financial savings. Going ahead, comparable offers ought to present a minimum of a few proportion factors in annual income development.

Lastly, we count on the corporate’s interval share repurchase to help earnings development on a per-share foundation. For context, the corporate has lowered its share rely by 44.9% and 23.3% since 1995 and over the previous decade, respectively.

Aggressive Benefits & Recession Efficiency

PPG enjoys various aggressive benefits. It operates within the paints and coatings trade, which is economically enticing for a number of causes.

First, these merchandise have high-profit margins for producers. Additionally they have low capital funding, which leads to vital money stream.

With that mentioned, the paint and coatings trade is just not very recession-resistant as a result of it relies on wholesome housing and building markets. This affect could be seen in PPG’s efficiency through the 2007-2009 monetary disaster:

• 2007 adjusted earnings-per-share: $2.52
• 2008 adjusted earnings-per-share: $1.63 (35% decline)
• 2009 adjusted earnings-per-share: $1.02 (37% decline)
• 2010 adjusted earnings-per-share: $2.32 (127% enhance)

PPG’s adjusted earnings-per-share fell by greater than 50% over the past main recession and took two years to get well. The silver lining throughout a recession is that owners could also be extra prone to paint their homes than to maneuver or tackle extra expensive dwelling renovations.

As PPG’s 2020 outcomes confirmed, the decline in new building is the dominant issue for PPG throughout a recession. Nevertheless, over the course of its historical past, the corporate has proven a capability to efficiently navigate recessions.

At present, the corporate’s margins are threatened because of the extremely inflationary and ongoing macroeconomic turmoil. Nevertheless, the corporate has traditionally managed to extend costs by equal to or above inflation charges. Thus, we stay assured concerning its profitability transferring ahead.

Valuation & Anticipated Returns

We count on PPG to generate earnings-per-share of $6.68 this yr. In consequence, the inventory is presently buying and selling at a price-to-earnings ratio of 17.9. We count on the inventory’s valuation a number of to converge towards its historic common over time, at round 19. It’s a considerably premium a number of within the present surroundings, however buyers have traditionally overpaid for PPG’s qualities and distinctive monitor file of dividend will increase.

In consequence, we view PPG inventory as comparatively undervalued proper now.

If the P/E a number of declines from 17.9 to 19 over the subsequent 5 years, shareholder returns can be lowered by 1.2% per yr.

Dividends and earnings-per-share development will increase shareholder returns. PPG shares presently yield 2.1%. Additional, we count on 8% annual EPS development over the subsequent 5 years.

Placing all of it collectively, PPG inventory is predicted to generate annual returns of 11.1% over the subsequent 5 years.

Remaining Ideas

PPG Industries is among the latest additions to the Dividend Kings record, having raised its dividend for the 51st consecutive yr in 2022.

The corporate has maintained a protracted historical past of dividend will increase every year, even throughout recessions, regardless of working in a cyclical trade that’s reliant on the well being of the U.S. financial system.

2020 was a really difficult yr for the corporate because of the coronavirus pandemic. And whereas 2021 has gone a lot better, a number of finish markets haven’t returned to their gross sales volumes from 2019.

PPG is experiencing a major enhance in uncooked materials prices, and provide chain points are additionally impacting results. Nonetheless, most inflationary prices have been handed alongside to the patron, whereas PPG Industries’ earnings-per-share development prospects over the medium time period seem enticing. 

We imagine the inventory is comparatively undervalued, which may lengthen future returns. With anticipated returns within the low-double-digits, we fee this Dividend King a purchase.

The next articles comprise shares with very lengthy dividend or company histories, ripe for choice for dividend development buyers: