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Sherwin-Williams Co (SHW): A Dividend Aristocrat Painting High Returns

Sherwin-Williams Co (NYSE:SHW) has annually increased dividends since 1979 and outperformed the market by nearly 14% per year over the last decade.

SHW Dividend

Watching paint dry has been quite rewarding with coatings producer SHW, but past performance is not necessarily indicative of future results.

As we review SHW for potential inclusion in our Top 20 Dividend Stocks portfolio, we will be paying close attention to the factors that have contributed to the company’s historical success and assess the likelihood of these factors persisting far into the future.

During the third quarter of 2015, the number of investors bullish on SHW (among the funds tracked by Insider Monkey) went up by 10 to 45. These funds amassed 7.80% of the company’s stock at the end of 2015. In the current round of 13F filings, billionaire Jim Simons’ Renaissance Technologies disclosed holding 303,900 shares of SHW.

Business Overview

SHW has been in business since 1866 and is the largest producer of paints and coatings in the United States (80% of its revenue) and third-largest worldwide. The company primarily serves the needs of architectural and industrial painting contractors and do-it-yourself homeowners through a network of more than 4,000 company-operated retail stores, but it also sells some industrial coatings, automotive finishes, and protective and marine coatings (around 20% of sales in 2014).

Business Analysis

SHW’s biggest competitive advantage is its controlled distribution model. The company operates over 4,000 retail stores, about as many as Home Depot Inc (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW) combined and four times as many as PPG Industries, Inc. (NYSE:PPG) (see our analysis of PPG here.)

Controlled distribution accounts for 75% of SHW’s total sales and provides the company with greater control over its brand image, in-store product experience, pricing, customer relationships, and inventory.

The majority of SHW’s customers are contractors, and many of them prefer to deal with dedicated paint specialists rather than working with big box stores like Home Depot. SHW can offer the best range and quality of paints, and its higher quality paints are more valued by contractors, which tend to be less price sensitive than consumers. Contractors know that SHW’s paints can help them complete jobs faster because of their higher quality (e.g. faster dry time, less coats required, etc.), which means more money in their pockets.

SHW is also likely to have a convenient location for contractors almost anywhere around the country – more than 90% of the U.S. population lives within a 50-mile radius of a SHW store. As contractors continue taking market share from do-it-yourself consumers, SHW’s business should continue to benefit.

As a result of SHW’s large network of stores, long operating history, strong brands, and direct in-store relationships with customers, it has built up number one brands in architectural paint, stain & protective finish, aerosol paint, auto specialty paint, painting tools, and wood sealers.

In addition to strong pricing power, SHW’s margins also benefit from the company’s vertical integration. Big box retailers must pay wholesale prices for their paint inventory, but SHW produces its own coatings, resulting in higher profits. The business also requires little capital, helping SHW consistently generate excellent free cash flow:

SHW Dividend FCF

Source: Simply Safe Dividends

Growing free cash flow is a sign of a very healthy business and tends to reward shareholders over long periods of time. SHW is no exception. As seen below, the stock compounded by 21.1% per year from 2006 through 2015, nearly tripling the market’s 7.4% annual return over this time period.

SHW Dividend TSR

Source: Simply Safe Dividends

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