TipRanks Smart Dividend Newsletter – Edition #24

Hello and welcome to the 24th edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.

Today’s dividend stock recommendation is the world’s largest paints and coatings producer, which has been constantly increasing dividends for over half a century.

But first, let us present a brief investment thesis, supporting our recommendation.


Investment Thesis: Painting Income  

In the dynamic and expansive arena of industrial production, the coatings and paints industry emerges as a critical sector. Companies in this industry play a key role in creating products that primarily provide two highly significant functions: decoration and protection. Paints and coatings are used to decorate and protect new construction and to maintain existing structures, as well as to protect industrial products, vehicles, vessels, plants, and equipment. Aside from aesthetics, paints and coatings are indispensable for preserving cars, homes, roads, appliances, and virtually everything else, and for providing durability and performance enhancement to tools and equipment under varied conditions.

Companies operating within this industry are key players in a multitude of markets, from automotive to aerospace, from construction to consumer goods, harnessing innovation to service the ever-evolving needs of global industries. The breadth of applications is vast, supporting countless end-users by improving product durability, energy efficiency, and overall performance.

The significance of this industry is underscored by its consistent delivery of value through great products and strong financial performance. For investors, this industry offers a compelling mix of stability and inventive progress—a combination suggesting not just immediate returns but also sustainable long-term growth. For those looking to invest, the paints and coatings industry offers a compelling blend of stability, innovation, and market presence—a triad that suggests sustained long-term potential.



Quality Dividend Stock: This Week’s Top Pick

PPG Industries, Inc. (PPG) is the world’s largest producer of paints and coatings. It manufactures and distributes paints, coatings, flat glass, and fabricated glass products, as well as specialty chemicals and materials. PPG’s products are sold to a wide variety of end users, including the automotive, aerospace, construction, and industrial markets.

PPG Industries operates through the Performance Coatings and Industrial Coatings segments. The Performance Coatings segment, responsible for ~60% of the annual revenues, offers coatings and other products, services, and technologies for vehicles, traffic and road, aircraft, marine use, and more. The Industrial Coatings segment, responsible for 40% of the annual revenues, offers coatings and treatments, as well as services and coatings applications for appliances, equipment, consumer electronics, automotive parts and accessories, building products, consumer products, packaging, batteries, etc.

The company was founded in 1883 as a manufacturer and distributor of glass under the name “Pittsburgh Plate Glass.” Today, PPG is a Fortune 500 company with annual revenues of $17.7 billion, commanding a market capitalization of $30.3 billion. It has a workforce of ~52,000 employees in 243 manufacturing facilities across more than 70 countries.

The wide range of industries using PPG’s products and services – ranging from aerospace and military vehicles to government ID card providers, to medical equipment, and more – provides a level of business diversification unmatched by its competitors. PPG holds the largest market share in the world in Automotive OEM, Aerospace, and Pavement/Road end-uses, and the second largest – after Sherwin-Williams Company (SHW), its main competitor – in Architectural, General Industrial, Refinish/Collision, and Packaging end-use markets.

The company achieved its impressive current size, a leading market position, and global presence, through heavy investment in technology and innovation, as well as numerous acquisitions. PPG’s innovation drive, and particularly its research and development focus, is a key differentiator between PPG and its competitors. PPG Industries maintains two research and development (R&D) facilities; the company holds over 18,000 patents globally and has received numerous global innovation awards.

In recent years, PPG has made over 20 acquisitions of companies and businesses. The most notable recent buyouts include German manufacturers of coatings Wörwag and Cetelon, U.S.-based protective coatings company VersaFlex, and a leading Finnish producer of decorative paint and coatings Tikkurila in 2021. In 2022, PPG acquired the powder coatings manufacturing business of Arsonsisi, an industrial coatings company based in Milan, Italy.

According to the company data for Q3 2023, PPG’s recent acquisitions cumulatively added $1.7 billion in annual sales and achieved ~$30 million in savings. They are also supporting the company’s geographical diversification, which is far greater than that of its comparable competitors. North America is responsible for 42% of PPG’s net sales, Europe, Middle East, and Africa (EMEA) – for 31%, Asia and Pacific – for 16%, and Latin America – for 11%.

Despite the very positive effect of the acquisition on PPG’s sales and prospects, in 2023 the company shifted its priorities, with one of the current top goals being reducing the debt load. While PPG’s financial health is robust overall, its debt-to-equity ratio of 78% is medium-high, although it has been reduced from over 100% in the past year. PPG’s debt is well-covered by operating cash flow, while interest payments are covered by EBIT many times over. The company’s debt is highly rated by the global credit rating agencies: S&P Ratings and Fitch Investors Service assign it a “BBB+” rating.

Particularly, Fitch mentioned PPG’s “global leadership positions in all of the major coatings end-use markets,” adding that it is “the only large coatings company that participates in all end-use markets, providing a source of competitive advantage.” According to Fitch, “PPG’s product, geographic, and end-market diversity insulates it to a degree from regional and end-market downturns.”

PPG Industries’ capital efficiency ratios are robust and compare favorably to the industry averages. Thus, the Return on Equity (ROE) of 20.6 and its Return on Assets (ROA) of 7.2 are much higher than the Chemicals industry averages. The company’s healthy liquidity position is underscored by its current ratio of 1.5 and quick ratio of 1.0. PPG’s profitability is also reflected in its margins, which are healthy relative to its industries: gross margin of 40.3%, operating margin of 12.1%, and net margin of 7.9%.

In the past three years, the company has been growing revenues at a CAGR of 9.6%, and earnings at a CAGR of 9.7%. In October, PPG reported its Q3 2023 results, with revenue in line with estimates and EPS delivering a strong beat. In fact, the company exceeded analysts’ EPS projections in 9 out of 10 latest quarters.

In the latest quarter, PPG reported record net sales, which rose 4% year-on-year, and record adjusted EPS, which surged 25% year-on-year. It also reported continued margin improvement and a strong increase in operating cash flow, which also reached a record high. Both business segments registered robust expansion, with the increase in net sales driven by aerospace, automotive original equipment manufacturer (OEM), automotive refinish coatings, and PPG Comex (PPG’s Mexican branch) businesses, all of which also produced record sales for a third quarter. That, despite continued weakness in the Chinese market and macroeconomic headwinds in the European market. As a result of a successful first half, PPG’s management lifted the company’s full-year 2023 EPS guidance.

The company’s financial strength supports its capital deployment strategy. In the past decade, the company has allocated 36% of available cash to acquisitions, 28% to share repurchase, 18% to capital spending, and 18% to dividends – i.e., the company has used ~54% of capital for business growth, and 46% were returned to shareholders.

In fact, the company’s alignment with shareholder interests has been in place for much more than a decade. PPG Industries is listed among Dividend Kings – companies that have been constantly increasing their dividends for 50 years or more. PPG has increased its dividend for 52 consecutive years; in the past decade, the payout grew by a CAGR of 7.7%. The latest increase was in July 2023, when the payout rose by 5%. PPG’s current dividend yield is 2.2%, versus the sector’s average of 1.9%.

Despite operating in a cyclical sector that is strongly influenced by macroeconomic factors globally, the company stood by its commitment to maintain dividend increases through good and bad economies. This history, coupled with PPG’s modest payout ratio of 34%, its strong market position, and the stated alignment with shareholders, supports the expectations of continued dividend increases over the years to come.

In addition to dividends, PPG returns capital to its shareholders through buybacks on an opportunistic basis. In 2022, the company returned around $190 million of cash to shareholders through share repurchases. This year, the company put strong emphasis on deploying its available cash to decrease its debt ratios and hasn’t made any meaningful share repurchases, with about $1 billion remaining on its current share repurchase program.

PPG Industries’ stock has been trading on the NYSE since 1983. In the past three years, PPG’s performance has been underwhelming, totaling a loss of 1%, while the Materials Select Sector SPDR Fund (XLB) rose 15%. However, in the past 12 months, PPG outperformed on the back of consistent beats on EPS, rising over 10% versus the XLB’s ~4% increase, while showing lower volatility than the ETF. Notably, the company operates within the Materials sector, which usually doesn’t feature parabolic stock runs, i.e., an annual increase of over 10% in a year of inflation and rising rates can be viewed as a great performance.

TipRanks-scored top Wall Street analysts see an average upside of 23.2% for the stock in the next 12 months. PPG Industries carries a TipRanks Smart Score rating of “Perfect 10” with a “Moderate Buy” recommendation:

After last year’s strong performance, PPG is trading at somewhat rich valuations: its TTM P/E of 21.4 and Forward P/E of 20.1 represent ~30% premiums to the U.S. Materials sector’s averages. However, when compared to peers in the industry, the company doesn’t look as expensive, on the contrary – it is the cheapest among its competitors, whose average PE ratio stands at 27.8.

To conclude, we believe that PPG Industries, a Dividend King with robust finances, a strong business model, good performance and delivery on strategy, and strong alignment with shareholder interests, is an attractive choice for dividend investors.



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