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News

PPG Is Way More Exciting Than Watching Paint Dry

Aaron Levitt Jul 27, 2016


There’s plenty of fact that goes into the old expression about being as boring as “watching paint dry.” Aside from the physical act of watching paint turn hard, as an industry, paint is pretty unexciting. This isn’t some high-tech data analytics firm or biotech on the cusp of curing cancer. It’s paint. There’s nothing particularly special about it.

And while paint is very boring, boring can be very profitable. Over the longer term, industries such as paint and coatings continue to churn out steady profits for their investors. And that’s exactly what PPG (PPG ) is doing.

The firm is one of the major players in a consolidating industry, and recent moves by PPG will make it an even bigger participant in the sector. For dividend investors, that’s great news for the firm’s cash flows and future payouts.

At the end of the day, PPG is way more exciting than watching paint dry.


A Big Player Focused on High Margins


Founded 133 years ago, PPG has transformed itself into one of the major paint and coatings manufacturers in the world. It — along with rivals Sherwin Williams (SHW ), Valspar (VAL ) and Akzo-Nobel — control more than 40% of the market for paint. PPG is firmly in second place in terms of production and revenues of the big four. That dominant positon has continued to afford PPG with ample cash flow generation and growing profits.

And although that includes products such as house paint, the real name of the game for PPG is the specialty coatings business. It turns out, paint really isn’t that boring.

PPG continues to focus on creating specialty coatings and finishes for markets such as aerospace and defense, industrial applications, automotive, and packaging. These coatings come with higher growth rates as well as higher margins than traditional architectural house paint. But even here, PPG has expanded into new specialty paints for things such as bridges and other specialty structures.

Over the past 10 years, PPG has made over 30 acquisitions — the bulk of them in the specialty coatings businesses. More recently, the paint giant purchased IVC Industrial, Cuming Microwave Corporation, and REVOCOAT. Those three buy-outs boosted PPG’s exposure to coatings and films products in the telecom, defense, healthcare, and electronics industries. It also exposured PPG to sealants, adhesives, and damper products for the automotive sector.

All of the buy-outs and organic growth in its specialty coatings businesses continue to drive top-line revenues and bottom-line profits for PPG. For its latest quarter, PPG managed to record its 14th consecutive quarter of double-digit percentage growth in earnings per share.


Getting Rid of Glass


And there could be more growth ahead as PPG transforms itself further. The letters in PPG actually stand for “Pittsburgh Plate Glass.” The firm was actually founded as a glass manufacturer. But glass isn’t exactly a booming business and has continued to be less and less of PPG’s overall earnings pie — which is why PPG is getting rid of it.

PPG already sold its automotive glass businesses a few years ago, but it has recently begun divesting itself of other glass operations. That includes selling its European fiberglass operations to Japanese glass manufacturer Nippon Electric Glass and, more recently, selling its flat glass manufacturing and glass coatings operations to Vitro SAB de CV. The firm has also speculated that its fiber glass operations in the U.S. could be on the chopping block in the months ahead.

When it’s all said and done, PPG will receive less than 2% of its revenues from glass. It’ll be a lean and mean machine focused on paint and specialty coatings.


Great for Dividends


For PPG, the sale of its low margined glass businesses and continued focus on high-tech paints is great news. Already, its efforts have borne fruit in terms of continual earnings improvement and cash flow generation. A higher repositioning of its margins will only strengthen this further.

It’ll only strengthen its dividend further as well.

PPG has been paying increasing dividends to shareholders for 45 consecutive years — with the past 10 years of average dividend growth being around 4.3%. The real kicker is that its payout ratio is a low 25%. Meaning there’s plenty of room for increases already. But when you add in its new higher margins from the sale of glass and focus on coatings, you get a real sense of what PPG is capable of on the dividend front.

Add in its cash balance and low debt, and you can see how PPG will be a winner.


Paint Your Portfolio


With its new strategy, PPG is proving that paint isn’t boring. And it won’t be a boring addition to your portfolio either. Ultimately, its rising earnings will translate into rising dividends for investors. At a P/E of around 21, PPG isn’t super cheap. But given just how fragmented the paint sector is, that premium for one of the sector’s leaders is worth it — especially when you factor in its potential.

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