PPG Industries, Inc. (PPG) manufactures and supplies protective and decorative coatings. The company is a dividend aristocrat which has increased distributions for 39 years in a row.
Over the past decade this dividend stock has delivered an annualized total return of 9.60% to its loyal shareholders.
The company has managed to deliver a negative average increase in EPS of 6.10% per year since 2000. Analysts expect PPG Industries to earn $5.04 per share in 2010 and $5.68 per share in 2011. This would be a nice increase from the $2.03/share the company earned in 2009. The company’s net income is exposed to the cyclical nature of the company’s business, as it shrinks during downturns but rebounds sharply during upturns.
Few cyclical companies can afford to raise dividends for as long as PPG Industries has done so. Companies that come to mind include Nucor (NUE) and RPM International (RPM). The main risk with cyclical companies is that the dividend is at risk depending on the length and depth of each recession. Future management could decide to cut dividends during the next recession, as the distributions would look unsustainable. However, if they expect an upturn within a year or two, chances are that the dividend would be at least maintained.
The company’s return on equity has closely followed the volatility in earnings per share over the past decade. One could easily pinpoint the periods of economic downturn, which is when the ROE decreased –2001-2002 and 2008-2009 recessions. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 3.20% per year since 2000, which is substantially higher than the growth in EPS. Despite the cyclicality of earnings, the company has managed to not only maintain but raise dividends consistently, which is not a minor accomplishment.
A 3% growth in distributions translates into the dividend payment doubling every 24 years. If we look at historical data, going as far back as 1973, we see that PPG Industries has actually managed to double its dividend every nine years on average.
Over the past decade the dividend payout ratio has increased from 45% to 105%. Based on estimated FY 2010 EPS of $5 however, the dividend looks adequately covered. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently PPG Industries is close to being overvalued at 19.40 times earnings, yields 2.40% and has a sustainable dividend payout based off forward earnings. The cyclical business model and the valuation relative to other dividend companies make this company a hold at current prices.
Full Disclosure: Long NUE and RPM
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