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Top 5 Dividend Aristocrats for

Long-term Investors

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This information is for general informational use only and is not personal investment advice. See the disclaimer on the last page for more. COPYRIGHT © 2016 Simply Safe Dividends LLC

Top 5 Dividend Aristocrats for Long-term Investors

Dividend aristocrats are popular stocks because they have

demonstrated an impressive ability to continue growing their payouts

throughout a number of different environments. Long dividend growth

streaks can be indicative of high quality, shareholder-friendly firms.

However, each aristocrat is different from the next. Some aristocrats

are very mature businesses that can only afford to increase their

dividend payouts by 1-2% per year. Others are closely tied to

unpredictable macro factors such as the price of oil and have less

control over their future.

Just because a company is a dividend aristocrat does not mean it is a

safe investment or will be able to continue raising its dividend. My

favorite dividend aristocrats for long-term investors are characterized

by enduring competitive advantages, large market opportunities for

growth, conservative management teams, and diversified operations

that can withstand even the harshest of economic environments.

While investing involves plenty of uncertainty and the world is always

changing, the five dividend aristocrats analyzed in this report appear

to offer potential for strong long-term dividend growth and capital

appreciation. I hope you enjoy my analysis, and thank you for reading.

Best Regards, Brian Bollinger, CPA CEO, Simply Safe Dividends

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Table of Contents Ecolab (ECL) ................................................................................. 4

Becton, Dickinson and Company (BDX) ....................................... 9

Colgate-Palmolive (CL) ............................................................... 13

Stanley Black & Decker (SWK) ................................................... 19

PPG Industries (PPG) ................................................................. 24

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Ecolab (ECL) Sector: Basic Materials Industry: Specialty Chemicals Business Overview ECL sells a wide range of sanitizers, cleaners, lubricants, cleaning systems, dispensers, water treatment products, and on-site services that are used by customers in virtually every industry (e.g. restaurants, hotels, hospitals, laundromats, manufacturing plants, oil wells, etc.) to keep their food safe, maintain clean environments, and optimize water and energy use. To give you an idea of ECL’s scope of business, each year the company helps customers wash more than 31 billion hands, clean dairy operations to help process 330 billion glasses of milk, process 1.2 billion loads of laundry, manager water on 100 offshore oil platforms, wash more than 146 billion plates, and manage 14 trillion liters of water. Overall, ECL is in more than 1 million customer locations in 172 countries around the world. The company merged with Nalco in 2011 in an $8 billion deal to become the global leader in water, hygiene, and energy technologies and services. This deal increased the company’s exposure to industrial markets, which are big users of water treatment products, and helped ECL serve customers more comprehensively. In 2013, ECL acquired Champion Technologies for $2 billion to significantly enhance its position in the upstream energy services market. By geography, ECL generated 57% of its 2015 revenue in North America, 23% in Europe, Middle East and Africa, 12% in Asia Pacific, and 8% in Latin America. Segments Global Industrial (35% of 2015 sales): provides water treatment and process applications, and cleaning and sanitizing solutions primarily to large customers within the manufacturing, food and beverage processing, chemical, metals and mining, power generation, pulp and paper, and laundry industries.

http://www.simplysafedividends.com/stock-analyzer/?symbol=ecl

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Global Institutional (32% of sales): provides specialized cleaning and sanitizing products to the foodservice, hospitality, lodging, healthcare, government, education, and retail industries. Global Energy (28% of sales): serves the process chemical and water treatment needs of the global petroleum and petrochemical industries in both upstream and downstream applications. The biggest piece of the business is oil fuel chemicals that treat reservoirs (e.g. kill bacteria, prevent corrosion, clean water). Other (5% of sales): provides pest elimination and kitchen equipment repair and maintenance. Business Analysis ECL is a unique business. The company has a large portfolio of valuable and protected technologies (over 6,700 patents) that allow it to sell its solutions at 10-20% price premiums compared to competitors’ offerings. While the initial cost is higher, the savings that these products deliver over time (e.g. less waste, more energy efficient, more reliable) make them cheaper. However, ECL’s main competitive advantages are its dependable service quality and people. At the end of the day, ECL is selling service and consistency (e.g. food needs to be kept safe, water needs to be kept clean, etc.). ECL has around 47,000 employees, and a whopping 25,000 are customer-facing. These employees visit more than a million customer sites in 172 countries each year to provide service. These frequent touchpoints reinforce the value of ECL’s unique products and systems being used by the customer. On-site visits also enable numerous growth opportunities for the company. ECL’s service-driven business model allows it to pursue a unique growth strategy that it calls, “Circle the Customer – Circle the Globe.” Essentially, ECL realizes that its customers are spending

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about $6 on addressable products for every $1 they spend with ECL (the company’s addressable market is $100 billion in size and highly fragmented; ECL is the largest player with 14% market share share). Once ECL establishes a relationship with a customer, it works to introduce new products and solutions from all of its business segments. For example, ECL might first win business with a restaurant with its dishwashing technology. From there, the company can try to sell products needed to clean the restaurant, help with water filtration, eliminate pests, keep food safe, repair kitchen equipment, and much more. Hotels are similar – their food services are very similar to a restaurant, and they have substantial room cleaning and laundry operations that can all use ECL’s products. With such a large service network in place, ECL is able to develop or acquire new products that can be scaled across its global operations or cross-sold into related markets very efficiently. As the largest player in the market, ECL also benefits because the largest customers in the market require a supplier that can meet their needs on a national or global level. They do not want to work with 100+ suppliers and systems around the world. ECL is uniquely positioned to handle their scale and complexity thanks to its breadth of products and global service team. As those big customers grow their businesses and expand into new regions, ECL grows with them. The very nature of ECL’s products further adds to the strength of its business model. Over 90% of ECL’s business is a recurring revenue stream (e.g. customers consume ECL’s sanitizers and need to reorder). While this provides reliable cash flow and stable operating margins, it also results in customer relationships that often last for decades. With cleaning and sanitizing products representing a small cost of the customer’s overall operations, ECL should retain the business as long as they don’t screw anything up. Furthermore, ECL’s employees build stronger relationships with customers and gather information critical to serving their needs better through their on-site visits.

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Overall, ECL’s leadership in the huge global markets for food, water, energy and healthcare provide plenty of long term growth potential. The company seeks to grow earnings by 15% per year and improve its return on invested capital to 20% over time. Key Risks ECL’s acquisitions of Nalco (2011 – $8 billion) and Champion Technologies (2013 – $2 billion) meaningfully altered the company’s mix. More specifically, they increased the company’s exposure to industrial production and energy markets. Some investors worried that ECL added unnecessary volatility to its otherwise stable business model. Management had to cut guidance twice in 2015 (extremely rare for ECL), perhaps adding some legitimacy to these concerns. With energy markets reeling and global growth remaining sluggish, these fears could be put to the test. The stock continues to trade at a relatively high P/E ratio relative to the broader market, suggesting that investors expect ECL to power through just about any macro environment like it always has with little fundamental risk. However, if depressed oil prices and sluggish industrial activity disrupt ECL’s results, the stock could meaningfully correct. The company’s stretched balance sheet doesn’t help either. Even if ECL’s business is somewhat more volatile than it was in the past, the company is still extremely durable. It is well diversified by product, geography, customer, and technology. About 90% of its sales are also recurring revenue streams in the form of consumable products (e.g. soaps, chemicals). ECL is here to stay for many years to come. Dividend Analysis Ecolab has paid a cash dividend for 79 consecutive years and has paid higher dividends every calendar year since 1986.

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The company last increased its dividend by 6% in 2015 and has compounded its dividend by 14% per year over its last 10 fiscal years. With a free cash flow payout ratio near 30%, excellent free cash flow generation, and generally recession-resistant products and services, ECL has very long runway to continue growing its dividend. Conclusion ECL is a wonderful business with a bright future. The company’s massive service network, breadth of services, strong technology portfolio, recurring revenue, and long-lasting customer relationships will likely serve it well for many years to come. ECL is no doubt one of the best blue chip dividend stocks that long-term dividend growth investors should keep in mind.

http://www.simplysafedividends.com/blue-chip-dividend-stocks/

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Becton, Dickinson and Company (BDX) Sector: Healthcare Industry: Medical Products Business Overview BDX was founded in 1897 and manufactures a wide range of medical supplies, devices, lab equipment, and diagnostics products. Some of its key products include syringes, needles, dispensing systems, and catheters, but its portfolio is well diversified. Many products help hospitals deliver medicines to patients. Customers include hospitals, clinics, physicians’ offices, pharmacies, labs, blood banks, and others. By geography, the majority of BDX’s sales are from outside of the U.S., and the company generates around 25% of its total sales from emerging markets. Segments Medical (68% of sales): medication management solutions, medication and procedural solutions, respiratory solutions, pharma systems, and diabetes care. Life Sciences (32% of sales): preanalytical systems, diagnostic systems, and biosciences. Business Analysis BDX acquired CareFusion for $12.2 billion in March 2015. Analyzing this deal, which was 20 times larger than any acquisition BDX had ever made, will highlight some of the strengths of BDX’s business model. CareFusion is a provider of medical devices and diagnostic products to hospitals and physicians. This deal essentially doubled the addressable market opportunity that BDX’s medical segment had from $8 billion to $16 billion. BDX’s extensive distribution channels, which reach all over the world, were a major driver behind the acquisition. CareFusion’s complementary products can be plugged into BDX’s existing channels

http://www.simplysafedividends.com/stock-analyzer/?symbol=bdx

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to reach international markets it had never been in before (60% of BDX’s sales are abroad, but 75% of CareFusion’s business is in the U.S.). As seen below, BDX will now be able to offer integrated medication management solutions and smart devices – from drug preparation and pharmacy to dispensing on the hospital floor, administration to the patient, and subsequent monitoring.

Source: BDX Investor Presentation As hospitals increasingly look to cut costs and improve quality, we believe medical device suppliers will likely continue consolidating. With CareFusion under its belt, BDX should be able to better help

http://phx.corporate-ir.net/phoenix.zhtml?c=64106&p=irol-presentations

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hospitals manage their drug use and cut down on their waste for several reasons. First, many of their products are complementary and will allow hospitals to save money by only purchasing from one supplier instead of several. For example, CareFusion manufactures equipment that pumps drugs into the catheters that are currently sold by BDX and put drugs into patients. Additionally, CareFusion provides BDX with software that helps hospitals track drug usage and the machines they use to store medicines and fill orders. These offerings will become increasingly important as hospitals focus on becoming more efficient. Other competitors lack the breadth and depth of BDX’s portfolio and seem increasingly likely to get squeezed out by the larger players. BDX’s brand recognition, distribution reach, and economies of scale serve as additional advantages in its markets. Beyond its comprehensive product portfolio and distribution channels, BDX spends over $600 million on R&D and has built up an arsenal of patents. The healthcare industry also operates under numerous regulations in every country, further raising barriers to entry. Key Risks Similar to our analysis of dividend aristocrat Medtronic, BDX must comply with a variety of healthcare regulations, which could result in pricing pressure, lower reimbursement rates for some of its products, and other unexpected headwinds. For example, part of the Affordable Care Act, which was enacted in March 2010, enacted a 2.3% excise tax on U.S. sales of certain medical devices. On the flipside, at least in the U.S., healthcare reform is helping more Americans gain health insurance coverage, increasing the number of needles, syringes, and other medical supplies consumed.

http://www.wsj.com/articles/becton-dickinson-to-buy-carefusion-for-12-billion-1412542363

http://www.simplysafedividends.com/medtronic-mdt-double-digit-dividend-growth-for-this-dividend-aristocrat/

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Outside of regulatory risk and currency headwinds, the company will have its hands full integrating CareFusion and extracting its expected synergies over the next few years. Given the size of this deal, especially compared to BDX’s historical acquisitions, execution needs to be strong. All things considered, BDX’s diversified portfolio, recession-resistant products, strong business model, long operating history, and disciplined management team increase the company’s durability. Dividend Analysis BDX has increased its dividend for 44 consecutive years and grew its dividend at a 12.8% annual rate over its last 10 fiscal years. The company’s future dividend growth prospects are excellent. BDX maintains a relatively low free cash flow payout ratio near 35%, generates consistent free cash flow, provides non-discretionary products, and maintains a reasonable balance sheet. If the company hits its double-digit earnings growth target, BDX’s dividend has potential to continue growing at a double-digit rate as well. Conclusion BDX is an excellent medical technology company. Its acquisition of CareFusion appears to offer numerous long-term growth opportunities as the healthcare landscape continues evolving and international markets spend more on healthcare. The company’s dividend is extremely safe with excellent growth prospects as well. If the company can deliver on management’s double-digit earnings growth goal, the stock has solid total return potential over the long term.

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Colgate-Palmolive (CL) Sector: Consumer Staples Industry: Soap & Cleaning Preparations Business Overview CL has been in business for more than 200 years and focuses on four consumer categories – oral care (46% of sales – toothpaste, mouthwash, toothbrushes), personal care (21% – shower gel, body lotion, liquid hand soap, bar soaps), pet nutrition (13% – specialty pet food), and home care (20% – household cleaners, liquid fabric conditioners, hand dishwashing soap). Some of the company’s most well-known brands include Colgate, Palmolive, Protex, Speed Stick, Ajax, Irish Spring, Sanex, Hill’s, and Softsoap. The company’s products are sold in over 220 countries, with about half of sales coming from emerging markets and over 80% of sales coming from outside of the United States. CL has operated in most of its current markets for more than 70 years. Business Analysis CL has been in business for a long time. William Colgate started a starch, soap, and candle business in New York City in 1806, nearly 210 years ago. The company’s first toothpaste was introduced in jars during the early 1870s and moved into a collapsible tube in 1896. Why does any of this matter? We think one of CL’s competitive advantages is the cumulative knowledgebase it has built up over the company’s lifetime. Over two centuries of R&D, marketing expertise, consumer insights, branding, distribution relationships, and much more have been accumulated. Perhaps equally important, CL has been in key emerging markets for a long time as well. For example, the company entered Mexico in 1925, Brazil in 1927, and India in 1937. This long-lasting presence has certainly helped CL understand these consumers well and tweak its brands and products to meet these consumers’ needs very well.

http://www.simplysafedividends.com/stock-analyzer/?symbol=cl

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Like we have discussed with Kimberly-Clark and General Mills, shelf space is another major advantage that incumbents have in the consumer staples sector. Retail customers want products that they know will sell and be invested in by the manufacturer in the form of expensive in-store displays, product packaging, and marketing campaigns. Taking a risk on new products from much smaller companies often provides little upside. CL invests heavily to stay ahead of trends in its markets, which are slow-changing to begin with. The company invested $277 million in R&D last year and dropped nearly $1.8 billion on advertising. These investments ensure that the company’s products continue to meet evolving consumer needs and remain in the forefront of their minds as they shop. As seen below, CL has been relentless with its advertising spending, creating strong brands the new entrants will have a very hard time challenging.

Source: Colgate Investor Presentation

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Altogether, CL’s longevity, effective R&D and marketing investments, and high quality management have allowed the company to dominate most of the markets it competes in. CL is #1 in toothpaste (45% global market share; more than 3x greater than its next biggest competitor and up from 35% in 1995; share is highest in many emerging markets – Mexico 81%, Brazil 72%); #2 in mouthwash; #1 in manual toothbrushes; #1 in liquid handsoap, #1 in liquid fabric conditioners; #2 in bar soaps and liquid body cleaning; #2 in hand dishwashing and household cleaners; and #1 in pet food sold through vet clinics. The company’s quality reputation and strong mindshare with consumers have helped it grow sales and profits through price increases. CL reported positive pricing changes in nine of the last 10 years and has averaged an annual pricing increase of more than 2%. CL’s competitive advantages show up in the company’s return on invested capital, which has remained stable and in excess of 30% each year over the last decade. Very few companies have earned such strong returns. Higher returning businesses are able to compound their earnings faster and fuel significant long-term dividend growth. From a growth perspective, CL’s track record is remarkable. The company more than quadrupled operating profits over the last 20 years and has consistently reported mid-single digit organic sales growth. Emerging markets are growing 2-3x faster than developed markets, providing a nice tailwind thanks to CL’s geographic mix (51% of sales were in emerging markets last year). In addition to emerging market growth, CL’s investments in new product lines and categories should also drive nice volume growth over the coming years. The company’s 2012 Restructuring Program is also expected to deliver $340-$390 million in annual after-tax savings by the end of 2016, allowing CL to reinvest in R&D and marketing to continue driving profitable growth.

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Key Risks The consumer staples sector attracts many dividend investors because its pace of change is typically slow and demand for many of its products is consistent even in weaker economic climates. For these reasons, the sector is viewed to have lower fundamental risk. With that said, consumer habits are constantly evolving. For example, many of the packaged food giants are struggling to shift their sales mix and brand perception into healthier natural and organic foods. Some branded product categories also face increased competition from private label brands, which have meaningfully improved in quality and won over more trust from consumers. When companies become very large in size and sometimes overextend their product portfolios, it becomes harder to combat these threats in a timely manner. Procter & Gamble is a prime example. We don’t believe CL faces as many of these risks as some of its peers do. Toothpaste doesn’t really face health concerns, and its evolutions (e.g. extra whitening) are minor compared to many other product categories. CL can also continue leveraging its brand to create any new product variations that come up in many of its markets and plug them into its existing distribution channels to fight off new threats. From a private label risk perspective, most of CL’s products are very personal items that are used daily by consumers, conditioning them to expect certain tastes, scents, and experiences. We believe personal products that are used daily have strong potential to build a more loyal group of consumers that are less willing to try lower priced items on the shelves. CL’s historical pricing power and volume growth give us some confidence in this assumption. During CL’s third quarter 2015 earnings call, management also commented, “At the same time, we’ve seen a decline in private label shares in many of our categories, indicating the consumer’s preference for branded products and respect of our equities.”

http://www.simplysafedividends.com/procter-gamble-pg-organic-growth-ahead-maybe/

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The company also noted that its market shares are up year-to-date in toothpaste, manual toothbrushes, mouthwash, liquid hand soap, body wash, and fabric conditioners. CL appears to remain in a position of strength today. In addition to changing consumer preferences and private label threat, the big boys sometimes get into market share battles with each other. The result is lower near-term earnings as higher marketing expenses are needed to protect share. For example, in 2004, CL issued a profit warning (its first since 1995) partly as a result of heavy marketing spending necessary to fight off intense global competition and the stock fell by 11%. We should also note that CL’s near-term results can be impacted by temporary macro headwinds. Over 80% of sales are generated outside of the United States, with 50% of revenue recorded in emerging markets. The strong U.S. dollar is denting reported growth, and many emerging markets are in turmoil as a result of slumping commodity prices and unfavorable foreign currency exchange rates. Demand for CL’s products is generally inelastic, but the business could experience some hiccups if these headwinds intensify. We don’t see any impact on CL’s long-term earnings potential and would be buyers on weakness. Dividend Analysis CL has one of the most impressive dividend track records of any stock in the market. The company has paid uninterrupted dividends since 1895 and increased its dividend for 53 consecutive years. CL’s dividend has increased by 10.5% per year over the company’s last 10 fiscal years, but dividend growth has slowed to a mid-single digit pace more recently. Going forward, dividend growth will likely continue at a mid-single digit clip, about in line with expected earnings growth. The company’s sub-

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60% payout ratios, stable end markets, and strong cash flow generation make it one of the most reliable dividend growers in the market. Conclusion CL is one of our favorite blue chip dividend stocks – uninterrupted dividends since 1895, a portfolio of household brands, resilient products, plenty of opportunities for long-term growth, and dominant market share around the world. Unlike some of its peers, we believe CL has a more compelling case for long-term earnings growth because of its stronghold in fast-growing emerging markets (rising incomes and hygiene standards) and ability to expand into adjacent product categories that leverage its brands and distribution channels (CL focuses on several core products today compared to dozens at P&G). The dividend is also extremely secure and appears to offer 5-8% annual growth potential going forward, easily outpacing inflation.


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Stanley Black & Decker (SWK) Sector: Industrial Products Industry: Machinery Tools Business Overview SWK was founded in 1843 and has grown into a diversified global provider of power and hand tools, products and services for various industrial applications, and security systems. The company sells over 500,000 products including power drills, saws, toolboxes, wrenches, fasteners, measuring tools, compressors, nail guns, outdoor power equipment, sanders, lamps, mowers, vacuums, workbenches, polishers, grinders, cordless tools, air tools, and more. Some of the company’s biggest brands are Stanley, DeWalt, Black+Decker, Porter Cable, and Bostitch. SWK’s largest end markets by revenue are residential / repair / DIY (20%), new residential construction (15%), non-residential construction (17%), industrial / electronics (17%), automotive production (8%), and retail (5%). By segment, SWK generated 63% of its 2015 revenue from Tools & Storage, 19% from Security, and 18% from Industrial. By geography, SWK generated 53% of its 2015 revenue from the U.S., 22% from Europe, 16% from emerging markets, and 9% from the rest of the world. Business Analysis SWK’s primary competitive advantages are its strong brands, product innovation, and global distribution channels. SWK’s brands and reputation for quality were established a long time ago. The company obtained the world’s first patent for a portable power tool in 1916 and has since amassed an unparalleled family of brands, products, and industry expertise. Before going further, it’s worth mentioning that Stanley Works acquired Black & Decker in early 2010 to create the biggest toolmaker in the U.S. This deal combined

http://www.simplysafedividends.com/stock-analyzer/?symbol=swk

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the leader in consumer and industrial hand tools and security with the leader in power tools. Today, SWK has over 13,000 active global patents and introduces about 1,000 new tool products per year, including many of the “world’s first” each year. The company has noted that new products drive over 85% of its organic growth, and NPD Data recognized the company for receiving the 8thmost patents in the world from 2010-2014. Innovation is a clear driver for the business, and SWK is able to leverage its brand equity into adjacent product categories for easy expansion. Most of its markets are extremely large and fragmented because they require so many different types of products (e.g. a home remodeling project could require saws, measuring tools, nail guns, vacuums, tools, drills, and more). SWK can develop or acquire new products where it has gaps and market them under its famous brands. The company invested over $6 billion in acquisitions since 2002 to advance its growth opportunities, and we expect more of the same to continue over the next decade as it continues consolidating its markets. SWK’s extensive distribution channels and shelf space are also advantages. Its products are in practically every home center and mass merchandise retailer because they have loyal customers, cover the broadest number of applications, and are proven to sell. As a result, SWK has number one global market share across power tools and hand tools and number two market share in engineered fastening and commercial electronic security services. With leading market share positions, SWK’s scale also helps it manufacture products at competitive costs (although the company typically focuses on the higher end of the market where there is less price competition). In the company’s Security (20% of sales) and Industrial (18%) segments, SWK’s business benefits from a partial recurring revenue model. It is tied to several large automotive companies that have

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selected SWK’s highly engineered fasteners for their models, and around 40% of the Security segment’s revenue is recurring in the form of software and monitoring services. The company’s Stanley Fulfillment System (SFS) is another big advantage that has enhanced SWK’s operating discipline. SFS has five primary elements that work together: sales and operations planning, operational lean, complexity reduction, global supply management, and order-to-cash excellence. SWK develops business processes and systems to reduce costs and improve the company’s return on capital. As an example, SWK was able to improve its working capital turnover by 56% from the end of 2010 to the end of 2014. This frees up more cash that can be used for acquisitions or returned to shareholders through buybacks and dividend increases. Over the next three years, SWK targets 4-6% organic sales growth and expects to resume acquisitions (during 2013, SWK placed a moratorium on acquisitions to focus on near-term priorities of operational improvement and deleveraging). With continued margin expansion and operating leverage, SWK expects earnings to grow by 10-12% per year. Key Risks With strong brands and a well-diversified portfolio of products in slow-changing markets, it’s no surprise that SWK has successfully been in business for more than 175 years. In our opinion, most of the risks faced by the company are related to currency fluctuations and macroeconomic trends. Construction and remodeling projects are two major business drivers which tend to move in cycles. In the U.S., 2015 was the best year for existing home sales since 2006, which suggests some of SWK’s business has been benefiting from unusually strong economic tailwinds. Should the housing market unexpectedly roll over, there could be a great buying opportunity.

http://www.bloomberg.com/news/articles/2016-01-22/previously-owned-sales-of-u-s-home-surge-more-than-forecast

http://www.bloomberg.com/news/articles/2016-01-22/previously-owned-sales-of-u-s-home-surge-more-than-forecast

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However, we don’t see any secular themes playing out that would necessarily challenge long-term demand for SWK’s product offerings. If anything, the company’s capital allocation decisions are possibly its greatest risk. After taking several years off from major M&A to fix an underperforming security business, improve operational efficiency, and deleverage, SWK expects to resume its acquisitive strategy over the next few years. If management makes an untimely deal, takes on too much debt, buys a bad company, or unfavorably alters the company’s business strategy, the stock could suffer. For example, SWK acquired European security company Niscayah in 2011. The business started losing customers throughout the integration process and forced SWK to later miss earnings guidance. Otherwise, we think SWK’s continued branding and product innovation investments will continue serving it well across its large and fragmented markets. It’s worth monitoring if customers begin switching to lower-priced products, especially in emerging markets, but brand loyalty seems to be pretty high across most of SWK’s product categories. Dividend Analysis SWK has paid its dividend for 139 straight years and increased its dividend for 48 consecutive years. The company is only two years away from joining the exclusive dividend kings list, which consists of companies that have raised their dividend for at least 50 consecutive years. The company’s dividend growth rate has averaged around 5% in recent years, but SWK’s 40% payout ratio and solid free cash flow generation provide plenty of room for continued increases. However, the company has a target payout ratio of 30-35% so near-term dividend growth will likely remain in the 4-6% range for now.

http://www.simplysafedividends.com/dividend-kings-list/

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Conclusion As a blue chip dividend stock, SWK has one of the best dividend track records an income investor will find. Few companies have existed for 175 years, much less paid a dividend for more than 130 consecutive years. With continued product innovation and brand investment, we believe SWK’s products will be in demand for many years to come. The company will face its ups and downs depending on currency exchange rates and macro trends in key markets such as construction, but we expect its profits to continue marching higher over long periods of time.


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PPG Industries (PPG) Sector: Basic Materials Industry: Diversified Chemicals Business Overview PPG’s roots can be traced back to 1883. Today, the company is a leading supplier of paints, coatings, and specialty materials to customers in construction (45% of sales), automotive (30%), industrial (15%), and aerospace and marine (10%) markets. Coatings provide protection, performance, and decoration for a wide range of products, improving their durability and marketability. Approximately 60% of PPG’s sales are special-purpose coatings (aerospace, automotive OEM, general industrial, packaging, marine, etc.) with the remaining 40% related to architectural applications. By geography, about 46% of PPG’s sales are in North America, 28% in EMEA, 16% in Asia Pacific, and 10% in Latin America. Altogether, PPG has a presence in more than 70 countries. Business Analysis Coatings are essential materials that make products last longer and look more appealing. For example, they make cars more resistant to corrosion and beverage cans more visually appealing. Some categories of coatings are more valuable than others. Consumers looking to repaint part of their home are going to be more sensitive to the price of paint (they perceive it as being an undifferentiated product) than an original equipment manufacturer (OEM) that is trying to improve the fuel efficiency and durability of its vehicles. As we mentioned earlier, the majority of PPG’s sales (60%) are special-purpose coatings, which target higher-value applications. The company has historically invested 3% of sales in R&D, which amounted to more than $500 million last year.

http://www.simplysafedividends.com/stock-analyzer/?symbol=ppg

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As a result of its investments, PPG is better able to protect its customers’ assets in some of the world’s most demanding conditions and environments and attain higher margins than most of its peers. In automotive markets, PPG’s coatings can be applied on numerous substrates including fiberglass, composites, and metallic surfaces for resistance to corrosion, chemicals, and rain erosion. PPG’s coatings also take advantage of a “wet-on-wet” application process that lowers customers’ capital costs and requires less energy. Customers can reduce the number of steps necessary to paint a vehicle by eliminating the primer layer. In aerospace markets, PPG’s technologies can reduce over 1,000 pounds per plane, improving aircraft fuel efficiencies. Not surprisingly, the company has demonstrated excellent pricing power over the last decade:

Source: PPG Investor Presentation

http://investor.ppg.com/phoenix.zhtml?c=112929&p=irol-presentations

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PPG’s long-standing customer relationships, economies of scale, and focus on specialty products has helped it maintain number one market share positions in aerospace, automotive OEM, and refinish / collision markets. The company is also number two in packaging, general industrial, and architectural markets. Despite being the largest player in the $130 billion coatings market, PPG’s market share is still less than 12%. With a high degree of fragmentation, the coatings market provides PPG with plenty of opportunity for continued growth and acquisitions. Another aspect we like about this business is that approximately half of PPG’s coatings sales are related to aftermarket and maintenance coatings, which generates a stable base of cash flow each year. Producing coatings also requires relatively little capital which, when combined with PPG’s excellent margins, results in impressive free cash flow generation. Finally, we like the strategic path that PPG’s management team has taken over the last decade. Coatings only accounted for 55% of PPG’s revenue in 2005. Through a mix of acquisitions, organic growth, and divestitures of non-core businesses, high-margin coatings products increased to 93% of PPG’s total sales in 2015. PPG’s Key Risks Over the near-term, changes in key raw material prices (e.g. titanium dioxide) can whip around PPG’s profits. The health of key end markets such as construction and automotive will also impact demand for PPG’s coatings. However, thinking longer-term, we believe coatings will continue to be used for many years to come. While we certainly wouldn’t be the first to find out, it’s hard to imagine a new technology displacing coatings. Perhaps the bigger risk is that competitors reduce their technology gap with PPG, which begins to pressure the industry’s margins in what used to be lucrative “special-purpose” coatings.

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Overall, we think the most likely risk over the next few years is a downturn in PPG’s core end markets, which it can do little to protect against. Dividend Analysis PPG has increased its dividend for 44 consecutive years, recoding a 7% annual dividend growth rate over that time period. The company last raised its dividend by 7.5% in April 2015 and continues to have excellent long-term dividend growth potential. With sub-30% payout ratios and solid prospects to continue consolidating the fragmented coatings industry, we expect at least mid-single digit dividend growth to continue for years to come. Conclusion Other than its low dividend yield, sensitivity to raw material prices, foreign currency fluctuations, and cyclical end markets such as construction, there’s really not much to dislike about PPG. The company appears to be well positioned in numerous profitable niches, has a leading portfolio of coatings technologies, regularly pushes through price increases, and generates excellent free cash flow each year. With less than 12% share of the global market, growth opportunities shouldn’t be a problem either. While PPG’s dividend yield is relatively low and its dividend growth hasn’t ramped up yet because the company is reinvesting in itself and making acquisitions, we think this is an interesting business for truly long-term dividend growth investors.

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