Top 5 Dividend Aristocrats for
Long-term Investors
2
Top 5 Dividend Aristocrats for Long-term Investors
Dividend
aristocrats
are
popular
stocks
because
they
have
demonstrated an impressive ability to continue growing their payouts
throughout a number of different environments. Long dividend growth
streaks can be indicative of high quality, shareholder-friendly firms.
However, each aristocrat is different from the next. Some aristocrats
are very mature businesses that can only afford to increase their
dividend payouts by 1-2% per year. Others are closely tied to
unpredictable macro factors such as the price of oil and have less
control over their future.
Just because a company is a dividend aristocrat does not mean it is a
safe investment or will be able to continue raising its dividend. My
favorite dividend aristocrats for long-term investors are characterized
by enduring competitive advantages, large market opportunities for
growth, conservative management teams, and diversified operations
that can withstand even the harshest of economic environments.
While investing involves plenty of uncertainty and the world is always
changing, the five dividend aristocrats analyzed in this report appear
to offer potential for strong long-term dividend growth and capital
appreciation. I hope you enjoy my analysis, and thank you for reading.
Best Regards,
Brian Bollinger, CPA
CEO, Simply Safe Dividends
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Table of Contents
Ecolab (ECL) ................................................................................. 4
Becton, Dickinson and Company (BDX) ....................................... 9
Colgate-Palmolive (CL) ............................................................... 13
Stanley Black & Decker (SWK) ................................................... 19
PPG Industries (PPG) ................................................................. 24
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Ecolab (ECL)
Sector: Basic Materials Industry: Specialty Chemicals
Business Overview
ECL sells a wide range of sanitizers, cleaners, lubricants, cleaning
systems, dispensers, water treatment products, and on-site services
that are used by customers in virtually every industry (e.g. restaurants,
hotels, hospitals, laundromats, manufacturing plants, oil wells, etc.) to
keep their food safe, maintain clean environments, and optimize water
and energy use.
To give you an idea of ECL’s scope of business, each year the
company helps customers wash more than 31 billion hands, clean
dairy operations to help process 330 billion glasses of milk, process
1.2 billion loads of laundry, manager water on 100 offshore oil
platforms, wash more than 146 billion plates, and manage 14 trillion
liters of water. Overall, ECL is in more than 1 million customer
locations in 172 countries around the world.
The company merged with Nalco in 2011 in an $8 billion deal to
become the global leader in water, hygiene, and energy technologies
and services. This deal increased the company’s exposure to
industrial markets, which are big users of water treatment products,
and helped ECL serve customers more comprehensively. In 2013,
ECL acquired Champion Technologies for $2 billion to significantly
enhance its position in the upstream energy services market.
By geography, ECL generated 57% of its 2015 revenue in North
America, 23% in Europe, Middle East and Africa, 12% in Asia Pacific,
and 8% in Latin America.
Segments
Global Industrial (35% of 2015 sales): provides water treatment and
process applications, and cleaning and sanitizing solutions primarily to
large customers within the manufacturing, food and beverage
processing, chemical, metals and mining, power generation, pulp and
paper, and laundry industries.
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Global Institutional (32% of sales): provides specialized cleaning and
sanitizing products to the foodservice, hospitality, lodging, healthcare,
government, education, and retail industries.
Global Energy (28% of sales): serves the process chemical and water
treatment needs of the global petroleum and petrochemical industries
in both upstream and downstream applications. The biggest piece of
the business is oil fuel chemicals that treat reservoirs (e.g. kill
bacteria, prevent corrosion, clean water).
Other (5% of sales): provides pest elimination and kitchen equipment
repair and maintenance.
Business Analysis
ECL is a unique business. The company has a large portfolio of
valuable and protected technologies (over 6,700 patents) that allow it
to sell its solutions at 10-20% price premiums compared to
competitors’ offerings. While the initial cost is higher, the savings that
these products deliver over time (e.g. less waste, more energy
efficient, more reliable) make them cheaper.
However, ECL’s main competitive advantages are its dependable
service quality and people. At the end of the day, ECL is selling
service and consistency (e.g. food needs to be kept safe, water needs
to be kept clean, etc.).
ECL has around 47,000 employees, and a whopping 25,000 are
customer-facing. These employees visit more than a million customer
sites in 172 countries each year to provide service. These frequent
touchpoints reinforce the value of ECL’s unique products and systems
being used by the customer.
On-site visits also enable numerous growth opportunities for the
company. ECL’s service-driven business model allows it to pursue a
unique growth strategy that it calls, “Circle the Customer – Circle the
Globe.” Essentially, ECL realizes that its customers are spending
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about $6 on addressable products for every $1 they spend with ECL
(the company’s addressable market is $100 billion in size and highly
fragmented; ECL is the largest player with 14% market share share).
Once ECL establishes a relationship with a customer, it works to
introduce new products and solutions from all of its business
segments. For example, ECL might first win business with a
restaurant with its dishwashing technology. From there, the company
can try to sell products needed to clean the restaurant, help with water
filtration, eliminate pests, keep food safe, repair kitchen equipment,
and much more. Hotels are similar – their food services are very
similar to a restaurant, and they have substantial room cleaning and
laundry operations that can all use ECL’s products.
With such a large service network in place, ECL is able to develop or
acquire new products that can be scaled across its global operations
or cross-sold into related markets very efficiently. As the largest player
in the market, ECL also benefits because the largest customers in the
market require a supplier that can meet their needs on a national or
global level. They do not want to work with 100+ suppliers and
systems around the world. ECL is uniquely positioned to handle their
scale and complexity thanks to its breadth of products and global
service team. As those big customers grow their businesses and
expand into new regions, ECL grows with them.
The very nature of ECL’s products further adds to the strength of its
business model. Over 90% of ECL’s business is a recurring revenue
stream (e.g. customers consume ECL’s sanitizers and need to
reorder). While this provides reliable cash flow and stable operating
margins, it also results in customer relationships that often last for
decades.
With cleaning and sanitizing products representing a small cost of the
customer’s overall operations, ECL should retain the business as long
as they don’t screw anything up. Furthermore, ECL’s employees build
stronger relationships with customers and gather information critical to
serving their needs better through their on-site visits.
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Overall, ECL’s leadership in the huge global markets for food, water,
energy and healthcare provide plenty of long term growth potential.
The company seeks to grow earnings by 15% per year and improve
its return on invested capital to 20% over time.
Key Risks
ECL’s acquisitions of Nalco (2011 – $8 billion) and Champion
Technologies (2013 – $2 billion) meaningfully altered the company’s
mix. More specifically, they increased the company’s exposure to
industrial production and energy markets.
Some investors worried that ECL added unnecessary volatility to its
otherwise stable business model. Management had to cut guidance
twice in 2015 (extremely rare for ECL), perhaps adding some
legitimacy to these concerns.
With energy markets reeling and global growth remaining sluggish,
these fears could be put to the test. The stock continues to trade at a
relatively high P/E ratio relative to the broader market, suggesting that
investors expect ECL to power through just about any macro
environment like it always has with little fundamental risk.
However, if depressed oil prices and sluggish industrial activity disrupt
ECL’s results, the stock could meaningfully correct. The company’s
stretched balance sheet doesn’t help either.
Even if ECL’s business is somewhat more volatile than it was in the
past, the company is still extremely durable. It is well diversified by
product, geography, customer, and technology. About 90% of its sales
are also recurring revenue streams in the form of consumable
products (e.g. soaps, chemicals). ECL is here to stay for many years
to come.
Dividend Analysis
Ecolab has paid a cash dividend for 79 consecutive years and has
paid higher dividends every calendar year since 1986.
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The company last increased its dividend by 6% in 2015 and has
compounded its dividend by 14% per year over its last 10 fiscal years.
With a free cash flow payout ratio near 30%, excellent free cash flow
generation, and generally recession-resistant products and services,
ECL has very long runway to continue growing its dividend.
Conclusion
ECL is a wonderful business with a bright future. The company’s
massive service network, breadth of services, strong technology
portfolio, recurring revenue, and long-lasting customer relationships
will likely serve it well for many years to come. ECL is no doubt one
of the best blue chip dividend stocks that long-term dividend growth
investors should keep in mind.
This information is for general informational use only and is not personal investment advice. See the disclaimer on the last page for more.
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Becton, Dickinson and Company (BDX)
Sector: Healthcare Industry: Medical Products
Business Overview
BDX was founded in 1897 and manufactures a wide range of medical
supplies, devices, lab equipment, and diagnostics products. Some of
its key products include syringes, needles, dispensing systems, and
catheters, but its portfolio is well diversified. Many products help
hospitals deliver medicines to patients. Customers include hospitals,
clinics, physicians’ offices, pharmacies, labs, blood banks, and others.
By geography, the majority of BDX’s sales are from outside of the
U.S., and the company generates around 25% of its total sales from
emerging markets.
Segments
Medical (68% of sales): medication management solutions,
medication and procedural solutions, respiratory solutions, pharma
systems, and diabetes care.
Life Sciences (32% of sales): preanalytical systems, diagnostic
systems, and biosciences.
Business Analysis
BDX acquired CareFusion for $12.2 billion in March 2015. Analyzing
this deal, which was 20 times larger than any acquisition BDX had
ever made, will highlight some of the strengths of BDX’s business
model.
CareFusion is a provider of medical devices and diagnostic products
to hospitals and physicians. This deal essentially doubled the
addressable market opportunity that BDX’s medical segment had from
$8 billion to $16 billion.
BDX’s extensive distribution channels, which reach all over the world,
were a major driver behind the acquisition. CareFusion’s
complementary products can be plugged into BDX’s existing channels
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to reach international markets it had never been in before (60% of
BDX’s sales are abroad, but 75% of CareFusion’s business is in the
U.S.).
As seen below, BDX will now be able to offer integrated medication
management solutions and smart devices – from drug preparation and
pharmacy to dispensing on the hospital floor, administration to the
patient, and subsequent monitoring.
Source: BDX Investor Presentation
As hospitals increasingly look to cut costs and improve quality, we
believe medical device suppliers will likely continue consolidating.
With CareFusion under its belt, BDX should be able to better help
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hospitals manage their drug use and cut down on their waste for
several reasons.
First, many of their products are complementary and will allow
hospitals to save money by only purchasing from one supplier instead
of several. For example, CareFusion manufactures equipment that
pumps drugs into the catheters that are currently sold by BDX and put
drugs into patients.
Additionally, CareFusion provides BDX with software that helps
hospitals track drug usage and the machines they use to store
medicines and fill orders. These offerings will become increasingly
important as hospitals focus on becoming more efficient.
Other competitors lack the breadth and depth of BDX’s portfolio and
seem increasingly likely to get squeezed out by the larger players.
BDX’s brand recognition, distribution reach, and economies of scale
serve as additional advantages in its markets.
Beyond its comprehensive product portfolio and distribution channels,
BDX spends over $600 million on R&D and has built up an arsenal of
patents. The healthcare industry also operates under numerous
regulations in every country, further raising barriers to entry.
Key Risks
Similar to our analysis of dividend aristocrat Medtronic, BDX must
comply with a variety of healthcare regulations, which could result in
pricing pressure, lower reimbursement rates for some of its products,
and other unexpected headwinds. For example, part of the Affordable
Care Act, which was enacted in March 2010, enacted a 2.3% excise
tax on U.S. sales of certain medical devices.
On the flipside, at least in the U.S., healthcare reform is helping more
Americans gain health insurance coverage, increasing the number of
needles, syringes, and other medical supplies consumed.
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Outside of regulatory risk and currency headwinds, the company will
have its hands full integrating CareFusion and extracting its expected
synergies over the next few years. Given the size of this deal,
especially compared to BDX’s historical acquisitions, execution needs
to be strong.
All things considered, BDX’s diversified portfolio, recession-resistant
products, strong business model, long operating history, and
disciplined management team increase the company’s durability.
Dividend Analysis
BDX has increased its dividend for 44 consecutive years and grew its
dividend at a 12.8% annual rate over its last 10 fiscal years.
The company’s future dividend growth prospects are excellent. BDX
maintains a relatively low free cash flow payout ratio near 35%,
generates consistent free cash flow, provides non-discretionary
products, and maintains a reasonable balance sheet.
If the company hits its double-digit earnings growth target, BDX’s
dividend has potential to continue growing at a double-digit rate as
well.
Conclusion
BDX is an excellent medical technology company. Its acquisition of
CareFusion appears to offer numerous long-term growth opportunities
as the healthcare landscape continues evolving and international
markets spend more on healthcare.
The company’s dividend is extremely safe with excellent growth
prospects as well. If the company can deliver on management’s
double-digit earnings growth goal, the stock has solid total return
potential over the long term.
This information is for general informational use only and is not personal investment advice. See the disclaimer on the last page for more.
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Colgate-Palmolive (CL)
Sector: Consumer Staples Industry: Soap & Cleaning Preparations
Business Overview
CL has been in business for more than 200 years and focuses on four
consumer categories – oral care (46% of sales – toothpaste,
mouthwash, toothbrushes), personal care (21% – shower gel, body
lotion, liquid hand soap, bar soaps), pet nutrition (13% – specialty pet
food), and home care (20% – household cleaners, liquid fabric
conditioners, hand dishwashing soap).
Some of the company’s most well-known brands include Colgate,
Palmolive, Protex, Speed Stick, Ajax, Irish Spring, Sanex, Hill’s, and
Softsoap.
The company’s products are sold in over 220 countries, with about
half of sales coming from emerging markets and over 80% of sales
coming from outside of the United States. CL has operated in most of
its current markets for more than 70 years.
Business Analysis
CL has been in business for a long time. William Colgate started a
starch, soap, and candle business in New York City in 1806, nearly
210 years ago. The company’s first toothpaste was introduced in jars
during the early 1870s and moved into a collapsible tube in 1896.
Why does any of this matter? We think one of CL’s competitive
advantages is the cumulative knowledgebase it has built up over the
company’s lifetime. Over two centuries of R&D, marketing expertise,
consumer insights, branding, distribution relationships, and much
more have been accumulated.
Perhaps equally important, CL has been in key emerging markets for
a long time as well. For example, the company entered Mexico in
1925, Brazil in 1927, and India in 1937. This long-lasting presence has
certainly helped CL understand these consumers well and tweak its
brands and products to meet these consumers’ needs very well.
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Like we have discussed with Kimberly-Clark and General Mills, shelf
space is another major advantage that incumbents have in the
consumer staples sector. Retail customers want products that they
know will sell and be invested in by the manufacturer in the form of
expensive in-store displays, product packaging, and marketing
campaigns. Taking a risk on new products from much smaller
companies often provides little upside.
CL invests heavily to stay ahead of trends in its markets, which are
slow-changing to begin with. The company invested $277 million in
R&D last year and dropped nearly $1.8 billion on advertising. These
investments ensure that the company’s products continue to meet
evolving consumer needs and remain in the forefront of their minds as
they shop. As seen below, CL has been relentless with its advertising
spending, creating strong brands the new entrants will have a very
hard time challenging.
Source: Colgate Investor Presentation
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Altogether, CL’s longevity, effective R&D and marketing investments,
and high quality management have allowed the company to dominate
most of the markets it competes in. CL is #1 in toothpaste (45% global
market share; more than 3x greater than its next biggest competitor
and up from 35% in 1995; share is highest in many emerging markets
– Mexico 81%, Brazil 72%); #2 in mouthwash; #1 in manual
toothbrushes; #1 in liquid handsoap, #1 in liquid fabric conditioners; #2
in bar soaps and liquid body cleaning; #2 in hand dishwashing and
household cleaners; and #1 in pet food sold through vet clinics.
The company’s quality reputation and strong mindshare with
consumers have helped it grow sales and profits through price
increases. CL reported positive pricing changes in nine of the last 10
years and has averaged an annual pricing increase of more than 2%.
CL’s competitive advantages show up in the company’s return on
invested capital, which has remained stable and in excess of 30%
each year over the last decade. Very few companies have earned
such strong returns. Higher returning businesses are able to
compound their earnings faster and fuel significant long-term dividend
growth.
From a growth perspective, CL’s track record is remarkable. The
company more than quadrupled operating profits over the last 20
years and has consistently reported mid-single digit organic sales
growth. Emerging markets are growing 2-3x faster than developed
markets, providing a nice tailwind thanks to CL’s geographic mix (51%
of sales were in emerging markets last year).
In addition to emerging market growth, CL’s investments in new
product lines and categories should also drive nice volume growth
over the coming years.
The company’s 2012 Restructuring Program is also expected to
deliver $340-$390 million in annual after-tax savings by the end of
2016, allowing CL to reinvest in R&D and marketing to continue
driving profitable growth.
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Key Risks
The consumer staples sector attracts many dividend investors
because its pace of change is typically slow and demand for many of
its products is consistent even in weaker economic climates. For these
reasons, the sector is viewed to have lower fundamental risk.
With that said, consumer habits are constantly evolving. For example,
many of the packaged food giants are struggling to shift their sales
mix and brand perception into healthier natural and organic foods.
Some branded product categories also face increased competition
from private label brands, which have meaningfully improved in quality
and won over more trust from consumers.
When companies become very large in size and sometimes
overextend their product portfolios, it becomes harder to combat these
threats in a timely manner. Procter & Gamble is a prime example.
We don’t believe CL faces as many of these risks as some of its peers
do. Toothpaste doesn’t really face health concerns, and its evolutions
(e.g. extra whitening) are minor compared to many other product
categories. CL can also continue leveraging its brand to create any
new product variations that come up in many of its markets and plug
them into its existing distribution channels to fight off new threats.
From a private label risk perspective, most of CL’s products are very
personal items that are used daily by consumers, conditioning them to
expect certain tastes, scents, and experiences. We believe personal
products that are used daily have strong potential to build a more loyal
group of consumers that are less willing to try lower priced items on
the shelves. CL’s historical pricing power and volume growth give us
some confidence in this assumption.
During CL’s third quarter 2015 earnings call, management also
commented, “At the same time, we’ve seen a decline in private label
shares in many of our categories, indicating the consumer’s
preference for branded products and respect of our equities.”
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The company also noted that its market shares are up year-to-date in
toothpaste, manual toothbrushes, mouthwash, liquid hand soap, body
wash, and fabric conditioners. CL appears to remain in a position of
strength today.
In addition to changing consumer preferences and private label threat,
the big boys sometimes get into market share battles with each other.
The result is lower near-term earnings as higher marketing expenses
are needed to protect share. For example, in 2004, CL issued a profit
warning (its first since 1995) partly as a result of heavy marketing
spending necessary to fight off intense global competition and the
stock fell by 11%.
We should also note that CL’s near-term results can be impacted by
temporary macro headwinds. Over 80% of sales are generated
outside of the United States, with 50% of revenue recorded in
emerging markets.
The strong U.S. dollar is denting reported growth, and many emerging
markets are in turmoil as a result of slumping commodity prices and
unfavorable foreign currency exchange rates. Demand for CL’s
products is generally inelastic, but the business could experience
some hiccups if these headwinds intensify. We don’t see any impact
on CL’s long-term earnings potential and would be buyers on
weakness.
Dividend Analysis
CL has one of the most impressive dividend track records of any stock
in the market. The company has paid uninterrupted dividends since
1895 and increased its dividend for 53 consecutive years.
CL’s dividend has increased by 10.5% per year over the company’s
last 10 fiscal years, but dividend growth has slowed to a mid-single
digit pace more recently.
Going forward, dividend growth will likely continue at a mid-single digit
clip, about in line with expected earnings growth. The company’s subThis information is for general informational use only and is not personal investment advice. See the disclaimer on the last page for more.
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60% payout ratios, stable end markets, and strong cash flow
generation make it one of the most reliable dividend growers in the
market.
Conclusion
CL is one of our favorite blue chip dividend stocks – uninterrupted
dividends since 1895, a portfolio of household brands, resilient
products, plenty of opportunities for long-term growth, and dominant
market share around the world.
Unlike some of its peers, we believe CL has a more compelling case
for long-term earnings growth because of its stronghold in fastgrowing emerging markets (rising incomes and hygiene standards)
and ability to expand into adjacent product categories that leverage its
brands and distribution channels (CL focuses on several core
products today compared to dozens at P&G). The dividend is also
extremely secure and appears to offer 5-8% annual growth potential
going forward, easily outpacing inflation.
This information is for general informational use only and is not personal investment advice. See the disclaimer on the last page for more.
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19
Stanley Black & Decker (SWK)
Sector: Industrial Products Industry: Machinery Tools
Business Overview
SWK was founded in 1843 and has grown into a diversified global
provider of power and hand tools, products and services for various
industrial applications, and security systems. The company sells over
500,000 products including power drills, saws, toolboxes, wrenches,
fasteners, measuring tools, compressors, nail guns, outdoor power
equipment, sanders, lamps, mowers, vacuums, workbenches,
polishers, grinders, cordless tools, air tools, and more. Some of the
company’s biggest brands are Stanley, DeWalt, Black+Decker, Porter
Cable, and Bostitch.
SWK’s largest end markets by revenue are residential / repair / DIY
(20%), new residential construction (15%), non-residential
construction (17%), industrial / electronics (17%), automotive
production (8%), and retail (5%).
By segment, SWK generated 63% of its 2015 revenue from Tools &
Storage, 19% from Security, and 18% from Industrial.
By geography, SWK generated 53% of its 2015 revenue from the
U.S., 22% from Europe, 16% from emerging markets, and 9% from
the rest of the world.
Business Analysis
SWK’s primary competitive advantages are its strong brands, product
innovation, and global distribution channels.
SWK’s brands and reputation for quality were established a long time
ago. The company obtained the world’s first patent for a portable
power tool in 1916 and has since amassed an unparalleled family of
brands, products, and industry expertise. Before going further, it’s
worth mentioning that Stanley Works acquired Black & Decker in early
2010 to create the biggest toolmaker in the U.S. This deal combined
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the leader in consumer and industrial hand tools and security with the
leader in power tools.
Today, SWK has over 13,000 active global patents and introduces
about 1,000 new tool products per year, including many of the “world’s
first” each year. The company has noted that new products drive over
85% of its organic growth, and NPD Data recognized the company for
receiving the 8thmost patents in the world from 2010-2014.
Innovation is a clear driver for the business, and SWK is able to
leverage its brand equity into adjacent product categories for easy
expansion. Most of its markets are extremely large and fragmented
because they require so many different types of products (e.g. a home
remodeling project could require saws, measuring tools, nail guns,
vacuums, tools, drills, and more).
SWK can develop or acquire new products where it has gaps and
market them under its famous brands. The company invested over $6
billion in acquisitions since 2002 to advance its growth opportunities,
and we expect more of the same to continue over the next decade as
it continues consolidating its markets.
SWK’s extensive distribution channels and shelf space are also
advantages. Its products are in practically every home center and
mass merchandise retailer because they have loyal customers, cover
the broadest number of applications, and are proven to sell.
As a result, SWK has number one global market share across power
tools and hand tools and number two market share in engineered
fastening and commercial electronic security services. With leading
market share positions, SWK’s scale also helps it manufacture
products at competitive costs (although the company typically focuses
on the higher end of the market where there is less price competition).
In the company’s Security (20% of sales) and Industrial (18%)
segments, SWK’s business benefits from a partial recurring revenue
model. It is tied to several large automotive companies that have
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selected SWK’s highly engineered fasteners for their models, and
around 40% of the Security segment’s revenue is recurring in the form
of software and monitoring services.
The company’s Stanley Fulfillment System (SFS) is another big
advantage that has enhanced SWK’s operating discipline. SFS has
five primary elements that work together: sales and operations
planning, operational lean, complexity reduction, global supply
management, and order-to-cash excellence. SWK develops business
processes and systems to reduce costs and improve the company’s
return on capital.
As an example, SWK was able to improve its working capital turnover
by 56% from the end of 2010 to the end of 2014. This frees up more
cash that can be used for acquisitions or returned to shareholders
through buybacks and dividend increases.
Over the next three years, SWK targets 4-6% organic sales growth
and expects to resume acquisitions (during 2013, SWK placed a
moratorium on acquisitions to focus on near-term priorities of
operational improvement and deleveraging). With continued margin
expansion and operating leverage, SWK expects earnings to grow by
10-12% per year.
Key Risks
With strong brands and a well-diversified portfolio of products in slowchanging markets, it’s no surprise that SWK has successfully been in
business for more than 175 years.
In our opinion, most of the risks faced by the company are related to
currency fluctuations and macroeconomic trends. Construction and
remodeling projects are two major business drivers which tend to
move in cycles. In the U.S., 2015 was the best year for existing home
sales since 2006, which suggests some of SWK’s business has been
benefiting from unusually strong economic tailwinds. Should the
housing market unexpectedly roll over, there could be a great buying
opportunity.
This information is for general informational use only and is not personal investment advice. See the disclaimer on the last page for more.
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22
However, we don’t see any secular themes playing out that would
necessarily challenge long-term demand for SWK’s product offerings.
If anything, the company’s capital allocation decisions are possibly its
greatest risk.
After taking several years off from major M&A to fix an
underperforming security business, improve operational efficiency,
and deleverage, SWK expects to resume its acquisitive strategy over
the next few years.
If management makes an untimely deal, takes on too much debt, buys
a bad company, or unfavorably alters the company’s business
strategy, the stock could suffer. For example, SWK acquired
European security company Niscayah in 2011. The business started
losing customers throughout the integration process and forced SWK
to later miss earnings guidance.
Otherwise, we think SWK’s continued branding and product innovation
investments will continue serving it well across its large and
fragmented markets. It’s worth monitoring if customers begin switching
to lower-priced products, especially in emerging markets, but brand
loyalty seems to be pretty high across most of SWK’s product
categories.
Dividend Analysis
SWK has paid its dividend for 139 straight years and increased its
dividend for 48 consecutive years. The company is only two years
away from joining the exclusive dividend kings list, which consists of
companies that have raised their dividend for at least 50 consecutive
years.
The company’s dividend growth rate has averaged around 5% in
recent years, but SWK’s 40% payout ratio and solid free cash flow
generation provide plenty of room for continued increases.
However, the company has a target payout ratio of 30-35% so nearterm dividend growth will likely remain in the 4-6% range for now.
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Conclusion
As a blue chip dividend stock, SWK has one of the best dividend track
records an income investor will find. Few companies have existed for
175 years, much less paid a dividend for more than 130 consecutive
years. With continued product innovation and brand investment, we
believe SWK’s products will be in demand for many years to come.
The company will face its ups and downs depending on currency
exchange rates and macro trends in key markets such as
construction, but we expect its profits to continue marching higher
over long periods of time.
This information is for general informational use only and is not personal investment advice. See the disclaimer on the last page for more.
COPYRIGHT © 2016 Simply Safe Dividends LLC
24
PPG Industries (PPG)
Sector: Basic Materials
Industry: Diversified Chemicals
Business Overview
PPG’s roots can be traced back to 1883. Today, the company is a
leading supplier of paints, coatings, and specialty materials to
customers in construction (45% of sales), automotive (30%), industrial
(15%), and aerospace and marine (10%) markets. Coatings provide
protection, performance, and decoration for a wide range of products,
improving their durability and marketability.
Approximately 60% of PPG’s sales are special-purpose coatings
(aerospace, automotive OEM, general industrial, packaging, marine,
etc.) with the remaining 40% related to architectural applications.
By geography, about 46% of PPG’s sales are in North America, 28%
in EMEA, 16% in Asia Pacific, and 10% in Latin America. Altogether,
PPG has a presence in more than 70 countries.
Business Analysis
Coatings are essential materials that make products last longer and
look more appealing. For example, they make cars more resistant to
corrosion and beverage cans more visually appealing.
Some categories of coatings are more valuable than others.
Consumers looking to repaint part of their home are going to be more
sensitive to the price of paint (they perceive it as being an
undifferentiated product) than an original equipment manufacturer
(OEM) that is trying to improve the fuel efficiency and durability of its
vehicles.
As we mentioned earlier, the majority of PPG’s sales (60%) are
special-purpose coatings, which target higher-value applications. The
company has historically invested 3% of sales in R&D, which
amounted to more than $500 million last year.
This information is for general informational use only and is not personal investment advice. See the disclaimer on the last page for more.
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As a result of its investments, PPG is better able to protect its
customers’ assets in some of the world’s most demanding conditions
and environments and attain higher margins than most of its peers.
In automotive markets, PPG’s coatings can be applied on numerous
substrates including fiberglass, composites, and metallic surfaces for
resistance to corrosion, chemicals, and rain erosion. PPG’s coatings
also take advantage of a “wet-on-wet” application process that lowers
customers’ capital costs and requires less energy. Customers can
reduce the number of steps necessary to paint a vehicle by eliminating
the primer layer.
In aerospace markets, PPG’s technologies can reduce over 1,000
pounds per plane, improving aircraft fuel efficiencies. Not surprisingly,
the company has demonstrated excellent pricing power over the last
decade:
Source: PPG Investor Presentation
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26
PPG’s long-standing customer relationships, economies of scale, and
focus on specialty products has helped it maintain number one market
share positions in aerospace, automotive OEM, and refinish / collision
markets. The company is also number two in packaging, general
industrial, and architectural markets.
Despite being the largest player in the $130 billion coatings market,
PPG’s market share is still less than 12%. With a high degree of
fragmentation, the coatings market provides PPG with plenty of
opportunity for continued growth and acquisitions.
Another aspect we like about this business is that approximately half
of PPG’s coatings sales are related to aftermarket and maintenance
coatings, which generates a stable base of cash flow each year.
Producing coatings also requires relatively little capital which, when
combined with PPG’s excellent margins, results in impressive free
cash flow generation.
Finally, we like the strategic path that PPG’s management team has
taken over the last decade. Coatings only accounted for 55% of PPG’s
revenue in 2005. Through a mix of acquisitions, organic growth, and
divestitures of non-core businesses, high-margin coatings products
increased to 93% of PPG’s total sales in 2015.
PPG’s Key Risks
Over the near-term, changes in key raw material prices (e.g. titanium
dioxide) can whip around PPG’s profits. The health of key end
markets such as construction and automotive will also impact demand
for PPG’s coatings.
However, thinking longer-term, we believe coatings will continue to be
used for many years to come. While we certainly wouldn’t be the first
to find out, it’s hard to imagine a new technology displacing coatings.
Perhaps the bigger risk is that competitors reduce their technology
gap with PPG, which begins to pressure the industry’s margins in what
used to be lucrative “special-purpose” coatings.
This information is for general informational use only and is not personal investment advice. See the disclaimer on the last page for more.
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Overall, we think the most likely risk over the next few years is a
downturn in PPG’s core end markets, which it can do little to protect
against.
Dividend Analysis
PPG has increased its dividend for 44 consecutive years, recoding a
7% annual dividend growth rate over that time period.
The company last raised its dividend by 7.5% in April 2015 and
continues to have excellent long-term dividend growth potential.
With sub-30% payout ratios and solid prospects to continue
consolidating the fragmented coatings industry, we expect at least
mid-single digit dividend growth to continue for years to come.
Conclusion
Other than its low dividend yield, sensitivity to raw material prices,
foreign currency fluctuations, and cyclical end markets such as
construction, there’s really not much to dislike about PPG.
The company appears to be well positioned in numerous profitable
niches, has a leading portfolio of coatings technologies, regularly
pushes through price increases, and generates excellent free cash
flow each year. With less than 12% share of the global market, growth
opportunities shouldn’t be a problem either.
While PPG’s dividend yield is relatively low and its dividend growth
hasn’t ramped up yet because the company is reinvesting in itself and
making acquisitions, we think this is an interesting business for truly
long-term dividend growth investors.
This information is for general informational use only and is not personal investment advice. See the disclaimer on the last page for more.
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Simply Safe Dividends
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