Sherwin Williams (NYSE:SHW) is a dividend aristocrat. This means that the company has continuously increased its dividend payout every year for the past 25-years. For Sherwin Williams' shareholders, this translates into a steady stream of reoccurring income. However, not all dividend stocks are created equal. Sky-high payout ratios and mounting debt can cause companies to cut their dividends, leaving shareholders starving for cash. Let's look at the underlying fundamentals of Sherwin Williams business to uncover whether it is a rewarding stock to buy today.
More than a pretty face?
Sherwin Williams is currently one of the biggest producers of paints and coatings in the United States. Helped by the recent housing recovery, shares of Sherwin Williams have climbed more than 20% year-to-date. As a result, the stock is currently trading near its 52-week high of $221 per share. This combined with the fact that Sherwin Williams has a price to earnings growth ratio or PEG of 1.98 indicates that the stock is slightly overvalued at its current levels.
Despite the recent run up in its stock price, Sherwin Williams' balance sheet looks healthy. The company carries a modest amount of long-term debt, though its operating profits are more than 29 times greater than the company's interest payments. This means Sherwin Williams should have no problem repaying the debt it owes. The stock's dividend also looks safe, with a payout ratio of 26% today. The payout ratio is particularly important for dividend investors because it tells us what portion of said company's income is paid out in dividends.
Therefore, for every dollar in net income Sherwin Williams generates, just 26% is being paid out as a dividend. This is more than reasonable, which means investors can rest easy knowing the king of paint will be able to continue rewarding shareholders with dividends for years to come. The company has increased its dividends every year since 1979. Moreover, Sherwin Williams currently pays an annual dividend of $2.20 per share.
All of this proves that Sherwin Williams is a reliable dividend stock. However, I'm not sure it makes the stock a buy today. Not only is the stock trading around an all-time high, but it also sports a dividend yield of just 1%. That is significantly below both the industry average of 2.35% and that of the S&P 500. Let this be a warning that just because a company has a proven track record of increasing its payout, it doesn't mean it is rewarding shareholders with loads of cash.
I believe Sherwin Williams' unimpressive dividend yield along with its ballooning share price translates into a dividend stock that isn't worth the cost now. Ultimately, there are plenty of other dividend aristocrats available to income investors today that boast much stronger yields at more reasonable valuations.
Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends Sherwin-Williams. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.