Competitive Advantages Make This the Top Dividend-Growth Stock for 2025
Industry and scale make this paints and coatings company a top 2025 stock pick for investors seeking dividends.
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The U.S. stock market is about to wrap up a very strong year. The S&P 500 Index is up 23% year-to-date, not including dividends. But there are still a number of quality stocks that can generate strong returns in 2025.
One such name is PPG Industries PPG, which has lost over 20% year-to-date. However, we believe the company will come out of this tough period as strong as ever, and as a result, PPG is our top dividend growth stock for next year.
Business Overview and Recent Events
PPG Industries is the world’s largest paints and coatings company. Its only competitors of similar size are Sherwin Williams SHW and Dutch paint company Akzo Nobel AKZOY.
PPG Industries was founded in 1883 as a manufacturer and distributor of glass (its name stands for Pittsburgh Plate Glass) and today has approximately 3,500 technical employees located in more than 70 countries at 100 locations. The company generates annual revenues of more than $18 billion.
PPG is being negatively affected by inflation. In the 2024 third quarter, revenue fell 1.5% to $4.57 billion, which was $90 million less than expected. However, the company is still able to generate earnings growth due to margin expansion and share repurchases.
For the third quarter, PPG’s adjusted net income of $500 million, or $2.13 per share, compared favorably to adjusted net income of $493 million, or $2.07 per share, in the prior year.
Third quarter organic revenue growth was once again flat compared to the prior year. Performance Coatings revenue of $2.921 billion was up 1% from the same period of 2023. Higher volumes (+2%) and selling prices (+1%) were partially offset by divestitures (-1%) and a headwind from foreign currency exchange (-1%).
Continuing a trend from prior periods, Aerospace demand was robust, with the business seeing record quarterly sales. Protective and Marine coatings and Automotive refinish were both higher for the period.
Growth Prospects
Going forward, cost cuts and share repurchases are solid catalysts for PPG’s earnings-per-share growth. In the most recent quarter, PPG Industries repurchased ~$200 million of its own stock, bringing the year-to-date total to ~$500 million.
The company also announced that it was selling its architectural coatings business in the U.S. and Canada for $550 million to a private equity firm as well as cutting its global workforce by about 1,800 workers.
For 2024, the company expects organic sales to be flat and adjusted earnings-per-share in a range of $8.15 to $8.30, down from a prior range of $8.34 to $8.59. At the midpoint, this would represent a 7.3% increase from the prior year. Continued earnings growth is key for the company’s dividend growth.
On July 18, 2024, PPG Industries raised its quarterly dividend 4.6% to $0.68, extending the company’s dividend growth streak to 53 consecutive years.
The company produced record results in 2023 and is projected to establish a new high for earnings-per-share once again in 2024. We expect dividends to grow at a rate matching earnings-per-share going forward.
Future growth is highly likely, due to the company’s competitive advantages. PPG Industries’ key advantage is that it is one of the most well-known and respected companies in the paints and coatings space.
The company is also one of just three similarly-sized companies in this industry, which limits PPG Industries’ competitors. This gives PPG Industries size and scale and the ability to increase prices.
Valuation Analysis and Expected Returns
Shares of PPG have declined over 20% year to date, which means the stock is low looking significantly undervalued. Shares are currently priced at 15.4 times expected 2024 earnings-per-share. The stock has traded with an average price-to-earnings ratio of 22.3 over the last decade. We reaffirm our target price-to-earnings ratio of 19 for 2029.
As a result, if the stock’s multiple were to expand to our target over the next five years, then valuation would add 5.5% to annual returns during this period. In addition, shareholder returns will be fueled by earnings growth (which we forecast at 8% per year) and dividends. PPG stock currently yields 2.3%.
PPG’s dividend payout is highly secure. Even after more than five decades of dividend growth, PPG Industries has a very low payout ratio. The only time the company’s dividend payout ratio was above 50% for the year in the relatively recent past was 2009. The average payout ratio since then is just 34%, demonstrating how conservative the company has been with regards to its dividend.
Overall, total returns are expected to reach 15.8% per year over the next five years, making PPG stock a buy.
Final Thoughts
PPG Industries has had a difficult year. The company is being impacted by inflation, which has hurt its profit margins while suppressing demand for paints and coatings. At the same time, however, now could be an excellent buying opportunity for this Dividend King.
The company set several quarterly records last year so comparable periods have been challenging this year. But we reaffirm our 2029 price target of $230 to reflect earnings estimates for the year, but continue to rate shares of PPG Industries as a buy due to projected returns.
At the time of publication, Ciura had no positions in any securities mentioned.