Updated on January 22nd, 2019 by Josh Arnold
PPG Industries (PPG) is one of the largest paint companies in the world. It is also one of the most reliable dividend stocks in the market; PPG has paid dividends every quarter since 1899. Moreover, the company has increased its dividend each year for the last 46 years, which qualifies it to be a member of the exclusive Dividend Aristocrats list.
PPG’s remarkable dividend consistency helps it to appeal to the more conservative members of the dividend growth investing community. This article will analyze PPG’s investment prospects in detail and determine whether the company merits a buy recommendation at current prices.
Business Overview
PPG Industries was originally founded in 1883 as a manufacturer and distributor of glass. The ‘PPG’ in PPG Industries stands for Pittsburgh Plate Glass, which is a reference to the company’s original operations. Over time, PPG has made remarkable strides in becoming an industry leader in the paints and coatings industry.
With a market capitalization of $25 billion and annual revenues in excess of $15 billion, PPG’s only competitors of similar size are fellow Dividend Aristocrat Sherwin-Williams (SHW), as well as Dutch paint company Akzo Nobel. PPGs’ strong market share can be seen in the following chart.
Source: Investor Presentation
PPG Industries has grown to such an impressive size thanks to its worldwide operating presence and focus on technology and innovation. The company has approximately 47,000 employees located in more than 70 countries at 150 unique locations. Its research and development focus is a key differentiator between PPG and other paint & coatings companies. PPG has grown to be a market leader today.
Growth Prospects
By and large, a company’s ability to increase revenues and profits is a function of their capital allocation. In fiscal 2018, PPG spent about $2.9 billion in cash, nearly 60% of which was devoted to its ample share repurchase program. This is more than what PPG is typically used to, with buybacks generally around one-quarter of cash usage, but acquisition spending was down on a relative basis in 2018.
With this in mind, it is likely that mergers and acquisitions will be a focus for PPG moving forward as the company moves back towards its core competency of portfolio optimization. Acquisitions have been a key growth driver for PPG for many years.
Source: Investor Presentation
The evidence supports this thesis. In late 2018, the company announced acquisitions including SEM, Whitford and Hemmelrath. This is consistent with PPG’s history of acquiring growth – and sometimes divesting non-core activities – and we have no reason to think that strategy won’t continue to be employed.
PPG is now virtually exclusively a coatings business. The transformation in recent years away from legacy businesses like glass and chemicals has left the company with an impressive portfolio of coatings products that collectively generate more than $15 billion in annual revenue. PPG recognized years ago that the future was in coatings and has positioned itself as such.
PPG’s track record suggests that the stock’s underlying business is likely to continue growing at a satisfactory rate for the foreseeable future. The company’s adjusted earnings-per-share over the trailing 15-year period can be seen below.
PPG Industries managed to compound its adjusted earnings-per-share at high single digit rates in recent years, although that growth has been nonlinear.
Earnings rebounded significantly in 2017 after a pension plan charge depressed profitability in 2017, but 2018 earnings were roughly flat year-over-year. We don’t think flat earnings are going to be the norm going forward, however, as PPG has impressive fundamentals that should fuel additional growth.
We believe that PPG is likely to grow more slowly than this rate moving forward. Investors can reasonably expect ~7% adjusted earnings-per-share growth from PPG Industries through full economic cycles.
PPG’s performance is likely to suffer during periods of economic recession, an observation that is discussed in the next section of this analysis.
Competitive Advantages & Recession Performance
PPG operates in the paints & coatings industry, which is economically attractive for a number of reasons. First, these products have high profit margins for manufacturers. They also have low capital investment, which results in significant cash flow.
Given all this, it begins to make more sense that there are two paint companies (Sherwin-Williams and PPG Industries) in the Dividend Aristocrats list.
With that said, the paint and coatings industry is not very recession-resistant because it depends on a healthy housing and construction market. This impact can be seen in PPG’s performance during the 2007-2009 financial crisis:
- 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% increase)
PPG’s adjusted earnings-per-share fell by more than 50% during the last major recession, and took two years to recover. While the long-term prospects of this Dividend Aristocrat remain bright, investors that own PPG should be willing to double-down and purchase more shares of this stock if a recession hits and its stock price falls precipitously.
Valuation & Expected Total Returns
PPG reported $5.92 in earnings-per-share for fiscal 2018, putting the current price-to-earnings multiple at 17.8. Earnings are expected to rise at a high single digit rate in 2019, so the forward price-to-earnings multiple would be more like 16.5. Either way, PPG trades below our fair value estimate of 19 times earnings, so the stock certainly appears to be undervalued.
Shares have traded sideways for years now as PPG’s earnings have moved around somewhat erratically. However, during this time, the company has continued its portfolio transformation, reduced the float via buybacks, and grown earnings. While growth has been lumpy, we think PPG looks attractive today given the lower-than-normal valuation.
We see PPG producing low double digit total returns in the years to come, consisting of the current 1.9% dividend yield, ~7% earnings growth and a ~3% tailwind from a rising valuation. This is good enough to earn a buy recommendation with the caveat that PPG is not a recession-resistant stock.
Final Thoughts
PPG Industries has many of the characteristics of a very high-quality business. It has a proven business model, and has generated strong growth over the past several years. It has a significant international presence, and multiple catalysts for future growth. Lastly, it has increased its dividend for nearly 50 years.
However, the company’s weakness during recessions means that even though its valuation looks appealing on paper, better buying opportunities are likely to occur in the future. PPG is attractive for its growth outlook and relatively cheap valuation, but note that investors could see lower prices if a recession occurs.
