The Dividend Aristocrats are a select group of currently 57 S&P 500 stocks with 25+ years of consecutive dividend increases. These 57 are large, US companies that have historically provided (slightly) better performance and (slightly) lower volatility than the S&P 500 as a whole.
S&P 500 applies the following criteria to construct the Dividend Aristocrats list:
- must be members of the S&P 500
- must have increased dividends every year for at least 25 consecutive years
- Market Cap at least USD 3 billion
- Liquidity at least USD 5 million (average daily value traded)
- Diversification, at least 40 constituents and no sector allocation above 30%
There are currently 65 Dividend Aristocrats. You can download an Excel spreadsheet of all 65 (with metrics) by clicking the link below:
This “in focus article” will discuss several aspects of the dividend aristocrat PPG Industries (PPG) and why the stock could be attractive for income investors based on our Dividend Score. Our Dividend Score System takes into account several fundamental and technical metrics that affect a company’s ability to continue paying dividends and its overall return.
PPG Industries (PPG) is also part of our international dividend portfolio.
PPG Industries (PPG) overview
|Dividend||Dividend Yield||DGR 3 years|
Data: December 9th, 2019
Business model and growth perspective
PPG Industries, Inc. founded in 1883, is a leading and global supplier of paints, coatings, and specialty materials. PPG has paid dividends every quarter since 1899. The company has increased its dividend each year for the last 47 years, which qualifies it to be a dividend Aristocrat and close to the dividend king status (50+years).
By annual revenue, in excess of $15 billion, PPG is the largest coatings company in the world followed by fellow Dividend Aristocrat Sherwin-Williams (SHW), and the Dutch paint company Akzo Nobel. In March 2017, PPG attempted to acquire AkzoNobel with an inital unsolicited takeover bid of €20.9 billion.
Source: Investor Presentation
In 2017, PPG finalized a multi-year strategic portfolio transformation with the sale of U.S. fiber glass business. The product portfolio is now fully focussed on coatings and paint. PPGs’ has a strong market share in the global paint and coatings industry and a good geographic mix.
With respect to growth PPG sees the following growth levers:
- Innovation growth
- Economic growth
- Acquisition growth
PPG has maintained a balanced cash deployment while completing over 20 strategic acquisitions since 2015.
Given its strong fundamentals and its products focus on coatings and paints, we believe investors can reasonably expect 7% adjusted earnings-per-share growth from PPG Industries.
Dividend history and dividend growth
It is important that companies that can maintain or even increase their dividend payments in bad times. This is an indication that the company has a strong market position in a stable business that performs well throughout the economic cycle.
As dividend aristocrat, PPG has raised its dividend already for 47 consecutive years. The current dividend growth rate is around 10% and overall a DGR of 7% (cagr) which is an average rate.
In July, PPG declared a quarterly dividend of $0.51/share, which is a 6.3% increase from the previous dividend of $0.48. The payout for the full fiscal 2019 is $2.04 per share after this July 2019 increase.
PPG Industries’ current dividend yield of 1.47% is -6% below its 5-year average. The 5-year average dividend yield is 1.56% (see red-line in the chart). This indicates the stock looks reasonably valued today.
The dividend payments are reasonably covered by its earnings, given the payout ratio of 32% Looking forward, its dividends in 3 years are forecast to be well covered by earnings (30% payout ratio). This future payout ratio is decent for this sector, we prefer a payout ratio of around 60%.
Stable cash flow
Without stable cash flow, it is almost impossible to maintain the dividend in times of a downturn. Operating free cash flow and free cash flow are 2 important metrics for a dividend stock. PPG industries has generated positive free cash flow in each of the last 10 years, which is a sign that PPG’s business has consistently earned enough cash to cover its spending needs, giving PPG more flexibility to maintain its dividend over time and continue its acquisition strategy.
Low debt ratio
Companies with a low debt ratio have the option of maintaining or even increasing the dividend even during recessions. The (net) debt-to-EBITDA ratio is a great metric to include. PPG’s net debt-to-EBITDA ratio, is at a decent level of 1.74 (the lower, the better). Net debt/EBITDA ratio values below 3.0 are even still acceptable. Overall PPG’s debt level appears to be in good shape and not putting the dividend’s safety at risk.
PPG’s forward P/E ratio of 19.9 is well above its 5-year average of 16.8, indicating that the stock looks expensive compared to how the market has valued it in recent years. The current valuation is at the high end, due to the fact that PPG’s stock price is rising significantly faster than its earnings. The current stock price is close to its all-time highs.
PPG has been able to increase dividends for 47 consecutive years. Nevertheless, the 65.3% drop (MDD) of the stock price is a “poor” performance during the recession, showing that this is probably not the best stock to own during a recession.
The company’s earnings-per-share performance during the recession period (2007-2009) can be seen below:
- 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)
See the stock price chart below:
Year-to-date PPG is trading up 30.8%, which is above the S&P 500 performance. The 10-year geometric annual performance is 14.8% annually. Looking at the win-ratio of 66% and a loss ratio of 2.5, those two ratios are average for this stock. After 2008, the price-performance of PPG is very impressive and combined with the dividend, the total return is 451.2% over the last 10 years.
PPG’s performance triangle.
PPG is a high-quality company with a global revenue stream and has a strong market position (wide-moat). As dividend aristocrat, PPG has raised its dividend already for 47 consecutive years. Going forward, there should be plenty of room for growth, both in terms of earnings (+7%) and dividends (1.9%).
PPG is attractive for its growth outlook and fair valuation, but Investors should note that PPG showed already a strong rally in 2019. Looking at the recession perfromance PPG may not be the best option for risk-averse investors who prioritize capital preservation. Currently, we rate PPG industries a hold.
Other Sources of Dividend Investment Ideas
The Dividend Aristocrats list is not the only way to quickly screen for businesses that regularly pay rising dividends.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of less than 20 businesses with 50+ years of consecutive dividend increases.
- The MoneyInvestExpert Defensive Aristocrats is a performance-based top-10 selection of the Dividend Aristocrats to outperform the market on the long-term.
- Portfolio lists like the Berkshire Hathaway Portfolio or Bill Gates’stock portfolio can be a source.
- For the European focused investors there is also the list of European Dividend Aristocrats.
- Dividend Champions are not necessarily members of the S&P 500 index, have increased their dividend for 25 or more consecutive years.
- 100+ years of dividend, the list of stocks that pay over 100 year of dividend can be an list of inspiration.
Next to selecting the right dividend stocks, important principles for successful long-term investing are Disciple, Diversification, Defensive & indeed Dividend. Read more about this in our free e-book.
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