„Investing should be more like watching paint dry or watching grass grow”
– Paul Samuelson, American economist and first American to win the Nobel Prize in Economic Sciences
arvy’s teaser: Investing does not need to be thrilling to be profitable. Sherwin-Williams, a ‘boring’ paint company, proves that steady growth, quality, and disciplined capital allocation are the true drivers of long-term success. And it shows: boring is good.
Boring.
Good investing is boring.
Unsurprisingly, a certain piece of investor wisdom still makes the rounds every now and then. It is Paul Samuelson’s comment “Investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas.” At arvy, we agree. To make your capital grow and work for you so you can fully benefit from compound interest, you need to sit on your hands and let the businesses you own do the work for you. Taking the long view.
Speaking of “boring” and “watching paint dry”: This year, two companies were replaced in the Dow Jones Industrial Index (Dow): Intel and Dow Chemical. Intel has been replaced by Nvidia and Dow Chemical has been replaced by a boring paint company.
Its mission to cover the earth began more than 150 years ago in 1866.
If you are looking for paint, they are the place to go.
Sherwin-Williams.
Chart 1: Sherwin-Williams paint store and its famous “Cover the Earth” logo
Source: Tradenetlease, Sherwin-Williams Company History
Representative of the State of the Economy
First things first: the Dow is the third most important index that investors follow, alongside the S&P 500 (500 largest US companies) and the Nasdaq 100 (mainly tech stocks, intended to represent innovation).
It contains only 30 stocks and is supposed to represent the US economy. The first published value was 40.94 in 1896.
Today?
The index stands at 44,910, which is a whopping 1,097-fold increase.
Given the idea behind the Dow, it is therefore no coincidence that Nvidia has been included as a driving force behind the artificial intelligence trend. On the other hand, it is also no coincidence that Sherwin-Williams is now part of it.
A boring paint business?
Why?
Paint touches everything – houses, cars, bridges, factories. And Sherwin-Williams is the largest supplier of paints in the US with over 5,000 stores.
Its customers are mainly professionals, the painters next door. Thus, because of the projects they carry out and therefore the demand for paint, Sherwin knows exactly how the economy is doing. We are talking about new buildings/houses, cars sold or renovation trends in the commercial or private sector.
Example?
During the Covid period, we saw a boom in the residential market with do-it-yourselfers painting their homes in peace during the lockdowns. Business was thriving, profit margins were high (chart 2), and the share price skyrocketed! However, 2022 brought inflation, squeezing consumers and raw material costs, which reduced margins despite minimal price increases. The stock price plummeted.
This puts Sherwin-Williams right in the middle of the economy, as housing accounts for around 18% of the US economy.
It is therefore a great representative of the state of the economy.
Chart 2: Gross margins during Covid and in subsequent years
Source: Sherwin-Williams, Annual Report 2023
Dividend King in the Making
Sherwin-Williams is the most trusted brand in the paint industry, producing high quality products that are sold at premium prices. Professional painters in particular favor the brand for its quality, ease of use and availability.
The great thing about it?
Professional painters are much less price sensitive as 80-90% of their cost is labor and only 10-20% is material. Many trust the quality of the Sherwin brand and are willing to pay more for their products.
We pay attention to people’s financial concerns, such as jobs, wages and cost of living, by focusing on what they buy. Their behavior reflects the strength of the economy. Ultimately, “it’s all about the economy, stupid.” As Bill Clinton put it in his victorious 1992 presidential campaign.
Ultimately, you will likely have to bear the cost of the higher prices as they will pass it on to you😉.
But since your home is your castle, it will be worth it. And I can assure you that Sherwin-Williams paints are known in the industry for their desirable qualities, such as coverage (fewer coats required), durability (longer life), cure time (shorter waiting time) and ease of application.
The company’s products are so good that 18 of the top 20 home builders and 17 of the top 20 property management companies in the US work exclusively with Sherwin Williams when it comes to paint products.
A testament to the company’s quality and decades-long ties to the professional paint market.
How are these ties and the enduring quality also reflected in the company’s business activities?
In a consistently disciplined capital allocation philosophy. It is reflected in 45 years of continuous dividend increases (chart 3) – although the dividend yield is only 0.7%. This means that the company is a dividend aristocrat, a seal of approval that is awarded after 25 years of consecutive dividend increases – only 66 stocks in the S&P 500 achieved this!
Five more years and Sherwin-Williams will receive the highest seal of approval in this segment.
50 years of uninterrupted dividend increases?
Dividend King!
Chart 3: Sherwin Williams with 45 years of consecutive dividend increases
Source: Koyfin
Boring is Good
Sherwin-Williams, being a great proxy for the state of the economy would mean that owning their stock would most likely make it difficult to outperform the general market, right?
Not so fast.
Although the underlying business is simple and follows the economy, the company has mastered operational efficiency – the “Good Story”. The company has never rested on its laurels, inventing new colors, introducing e-commerce and digitalization through its app, and hiring the best people. Alongside a strong balance sheet and disciplined capital allocation, this has led to continuous and stable outperformance over the years – the “Good Chart”.
And looking to the future? There are long-lasting structural trends such as new home construction with an annually growing footprint, an aging housing fleet with an average age of 40 years, recovery from climate and natural disasters and changing color trends. Plenty of growth opportunities.
I know it is much cooler to talk about artificial intelligence, but Sherwin-Williams’ unglamorous paint business is another example of a great compounder.
And it once again impressively demonstrates one thing.
Chart 4: Sherwin-Williams over ten years
Source: TradingView
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