Sherwin-William’s full-year 2024 sales increased very slightly (up 0.2%) to $23.1 billion. Sales actually increased by a low single digit percentage driven by a combination of volume growth and price increases, but that was nearly all offset by FX headwinds. Its gross margins improved 180 basis points to 48.5% and pre-tax profit margins (or earnings before tax or EBT margins) expanded 140 basis points to 14.9%. This is impressive margin expansion on flat sales, and I think is emblematic of the operating leverage potential in the business model once sales growth returns. This margin expansion plus share repurchases resulted in Sherwin-Williams growing 2024 adjusted EPS 9.5% to $11.33.
Free cash flow (FCF) declined 21% to $2.08 billion in 2024 (down from $2.63 billion in 2023) resulting in a FCF margin of 9% and FCF conversion on GAAP net income of 78%. The decline in FCF was driven by both lower cash flow from operations (because of higher working capital) and higher CapEx relative to 2023. Sherwin-Williams generated a return on invested capital (ROIC) of 15% and return on equity (ROE) of 69%, both numbers roughly flat compared to 2023. Sherwin-Williams returned $2.5 billion to shareholders in 2024 via dividends and buybacks compared to $2.1 billion in 2023 and $1.5 billion in 2022.
Sherwin-Williams does not build cash on the balance sheet. Its priorities for allocating cash flow are to consistently grow the dividend, then grow through acquisitions, and then to return excess capital to shareholders through share repurchases. Sherwin-Williams targets a 30% dividend payout ratio and has increased the dividend for 47 consecutive years. The current dividend yields nearly 1%. And in the last decade it spent $11 billion buying back stock at an average price of about $207 per share (compared to today’s price of about $340).
(Note that following the Q4:2024 earnings call Sherwin-Williams increased its quarterly dividend to $0.79, which is an annual dividend of $3.16. This was Sherwin-Williams 47th consecutive year of increasing the dividend).
Sherwin-William’s balance sheet remains healthy enough. It has $11.9 billion in net debt, but its interest coverage (EBIT/interest expense) of 9x is the highest since 2017. It has generated an average of $2.2 billion in FCF in the last five years so its net debt to average FCF is 5.4x. That’s on the high side of what I’m normally comfortable with, but Sherwin-Williams has a balanced debt maturity schedule and 93% of debt is fixed rate with a weighted average cost of debt of only 3.47%.
Sherwin-William’s 2025 guidance calls for sales growth of a low single digit percentage and adjusted EPS of $11.65 to $12.05 (implying growth of about 3% to 6%). This EPS growth is below my long-term expectation of 7%-10%+ EPS growth because management expects macro demand softness to persist into the second half of 2025 and possibly into 2026. Other headwinds to EPS growth in 2025 are higher interest expense (from refinancing some debt maturities at higher interest rates) and $100 million in costs associated with moving into the new corporate headquarters. Sherwin-Williams plans to open 80-100 new stores in 2025.
Over the medium-term Sherwin-Williams has financial targets to generate mid-single digit percentage sales growth, gross margins of 47% to 50%, return on net assets employed (RONAE) in the mid 20% range, and FCF margins of at least 13%. Importantly, the firm’s incentive compensation is partly based on achieving RONAE targets.
To me the investment case is pretty straight forward. U.S. architectural paint gallons fell for three consecutive years coming out of the Covid-induced shelter-in-place housing boom and the industry is still recovering. Demand has also been weak because of a two-year industrial recession in the U.S. But I have high conviction that the U.S. (and the world) will consume more paint and coatings in 10 years, 20 years, and even thirty years from now. (Honestly, why stop at 30 years? Based on everything I know and believe today, I think this will be the case 100 years from now).
And I also have high conviction that Sherwin-Williams will maintain its leading market share because of its leading brands, leading distribution partners, leading R&D engine, strong long-term relationships with the largest home builders and contractors, and its global supply chain and scale. It’s like when Warren Buffett once said “Coca Cola will sell over 21 billion cases of various products around the world this year and it goes up every year.” I feel the same way about Sherwin-Williams with paint/coatings gallons, the only difference being that I see paint and other protective coatings as essential products, and Coca-Cola as a non-essential pleasure. But both products are also relatively small ticket items that tend to hold up better during economic slowdowns and both have pricing power. Sherwin-Williams has a history of increasing prices to offset input cost inflation.
Sherwin-Williams may not increase gallons every year, but I’m confident, as I said, that gallons will be higher in ten years, twenty years, and even longer. And when industry volumes do return, I suspect that Sherwin-Williams operating leverage will kick into higher gear and EPS will compound at closer to 10% (and maybe higher) over time. Although my thesis on Sherwin-Williams is not based on the direction of interest rates, if rates were to fall, that could drive existing home sales, new homes starts, home remodels, and industrial projects which would drive demand for Sherwin-William’s products. Finally, I think of Sherwin-Williams as one of about 8 rocks in the portfolio, or stocks that I think (hope) will provide some ballast during market sell-offs.
Are shares expensive at 28x forward? Optically, maybe, but I think the company deserves an above-average multiple because of its wide moat, stable/predictable growth profile, pricing power, rising returns on invested capital, ROE in the 70% range (yes, juiced with debt), strong management with effective capital allocation, and long duration (moderate but long) EPS growth.
Disclosure: John Rotonti is an investor in and the portfolio manager of the Bastion Industrials and Infrastructure Portfolio, which owns shares of Sherwin-Williams.
Disclaimer: This article is for informational purposes only and should not be relied upon as a basis for investment decisions. Investors should determine for themselves whether a particular service or product is suitable for their investment needs or should seek such professional advice for their particular situation. All statements made regarding companies, securities or other financial information contained in the article are strictly beliefs and points of view held by Bastion Fiduciary and are not endorsements of any company or security or recommendations to buy or sell any security.