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Why Sherwin-Williams' Shares Soared 43% Higher in 2021

By Jim Halley – Jan 9, 2022 at 5:41AM

Key Points

  • The company continues to see increased sales and a strong outlook, thanks to the housing shortage.
  • Supply issues are its biggest concern.
  • As a market leader, it enjoys pricing power.

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The paint-and-coatings giant closed out the year on a strong note.

What happened

Sherwin-Williams (SHW 0.79%), the world's largest paint and coatings company, saw its shares rise 43% in 2021, according to data from S&P Global Market Intelligence. The stock began 2020 at $245 a share on Jan. 4 and rose to as high as $353.27 on Dec. 31. While that's a nice jump, the stock has been riding high for a long time, with its shares rising 247.6% over the past five years.

The biggest reason for the stock's growth last year is that demand remains high for the company's products, and despite the rising costs of raw materials, the company has the type of market share that allows it to have pricing power. The company's biggest concern lately, mentioned in its third-quarter earnings call, is that supply issues are causing it to lose sales because it's having a hard time making enough product. That's not good, but it's better than having little demand, and apparently investors see it as a solvable problem in the long run.

A house painter works on a house.

Image source: Getty Images

So what

Investors love the company because it's the model of stability, in part because of its huge size and the pricing power that comes with being a market leader. It has 61,000 employees and 4,770 stores across more than 120 countries. The company's dividend yield is only 0.68%, well below the S&P 500 average of 1.27%, but that's largely a function of how popular the stock has been. Sherwin-Williams has increased its dividend for 43 consecutive years, including a 23.1% raise this year to $0.55 per quarterly share and its cash dividend payout ratio of 22.19% shows there's plenty of likelihood those raises can continue. It has seen its adjusted earnings per share (EPS) rise by 17.1% over the past five years.

Through nine months, the company reported revenue of $15.2 billion, up 9% year over year, while adjusted EPS were down slightly in the third quarter, compared with the same period a year earlier. The company's guidance says it expects adjusted EPS of $8.35 to $8.55, still above last year's adjusted EPS of $8.19.

Now what

There are two things working against this industrial stock for potential investors. The supply chain issue is cutting into the company's profits and slowing sales, and with a 44.30 price-to-earnings (P/E) ratio, the stock now appears to be expensive when you compare it with the 28.19 P/E of its closest competitor, PPG Industries. Sherwin-Williams' price is a lot closer to its 52-week high of $354.15 than to its 52-week low of $218.06.

In the long run, however, it pays to buy quality stocks that have market forces in their favor, and Sherwin-Williams fits that bill. With the current housing shortages in the U.S. and Canada, there's going to be a building boom, and that, along with the current home improvement trend, will certainly benefit Sherwin-Williams.

Jim Halley has no position in any of the stocks mentioned. The Motley Fool recommends Sherwin-Williams. The Motley Fool has a disclosure policy.

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