PPG Industries’ earnings per share keep setting new records. This lets it reinvest and reward its shareholders with attractive dividends and buybacks.
PPG operates three segments in nearly 70 countries worldwide. Performance Coatings helps protect outdoor equipment—such as airplanes, ships and vehicles—against the elements. PPG also provides house and building paints including the Olympic and Glidden brands. This segment generated 56.4 per cent of its sales and 55.3 per cent of its income.
Industrial Coatings paints vehicles made by auto companies as well as other, smaller, markets. This segment produced 36.4 per cent of the sales and 43.4 per cent of the income.
The Glass segment produces fibre glass for auto and energy-related industries. This segment generated only 7.2 per cent of the sales and 1.3 per cent of the income.
Since late March, PPG’s shares have climbed over seven per cent. That’s because the company keeps achieving record earnings per share. It’s also a ‘dividend aristocrat’, having raised its dividend 43 years in a row. While the shares are costly, the fast earnings growth justifies a higher price. PPG remains a buy for long-term gains as well as high and rising dividends.
In the first half of 2014, it earned a record $670 million, or $4.77 a share, excluding one-time items in both periods. This was up by over 37 per cent from $509 million, or $3.47 a share, a year earlier. The company says that it achieved record earnings in each major region. Europe’s earnings contribution grew the fastest, at 28 per cent. According to president and chief executive officer Charles Bunch, in the past six quarters the adjusted earnings advanced by more than 30 per cent.
Share buybacks assisted the profit growth
PPG’s fast growth in earnings per share partly reflected its share repurchase program. In the second quarter, it spent $100 million to buy back 500,000 shares. In the first half, the company had average shares outstanding of 138.9 million. This was down by 6.1 million shares from an average of 145 million, in last year’s first half.
The market expects PPG to earn $9.57 a share in 2014. That would be up by 15.6 per cent from $8.28 a share last year. This means that the shares trade at a hefty forward price-to-earnings, or P/E, ratio of 21.8 times. At this time of the year, however, the market focuses more on next year’s earnings estimates. In 2015, PPG’s earnings are expected to rise by 16.3 per cent, to $11.13 a share. Based on this estimate, PPG trades at a more reasonable P/E ratio of 18.9 times.
And remember these two favorable factors: First, PPG’s past earnings per share growth suggests that these estimates may be overly conservative. Second, the earnings estimate consensus has generally risen. We expect this to continue. If earnings per share grow faster than expected, the P/E ratios will come down to more attractive levels. And faster earnings per share growth would justify a higher share price.
PPG plans to keep growing. Mr. Bunch says, “Strategically, we continue to complete significant actions focused on expanding our global presence. We closed several small acquisitions this year, and most noteworthy we reached agreement to acquire [Mexico-based] Comex.” This $2.3 billion acquisition will raise PPG’s presence in Latin America. On July 1 and July 2, PPG made two more small acquisitions.
PPG can afford to make these acquisitions. That’s because it holds cash and short-term securities of $2.913 billion. The company’s total debt of $3.383 billion is comfortably low. It’s small relative to PPG’s high and growing cash flow of $8.24 billion. This year and next, PPG plans to spend from $3 to $4 billion on acquisitions and share repurchases.
Mr. Bunch is optimistic about PPG’s prospects. He says, “Looking forward, we remain highly focused on deploying our strong cash position and balance sheet for additional earnings-accretive opportunities. We believe that our geographic diversity, coupled with our previous structural cost reductions, will allow us to continue to deliver excellent earnings performance from increased global demand.”
PPG Industries (NYSE—PPG) is a buy for long-term price gains as well as high and rising dividends.
The Investment Reporter, MPL Communications Inc.
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