That glorious feeling when you find some extra money to put to work. It’s awesome, isn’t it? May not be much, but every little bit helps us build our dividend income, and thereby accelerates our drive to financial independence. Those pennies can compound pretty hard over time, you know. So with appropriate thanks to whatever deity gifted me with this extra moolah, I have a new purchase to announce:
I bought 2 shares of Sherwin-Williams Co (SHW) @ $283.48 (+$5.36 in annual income)
Since I already own this company (and I even wrote about it before), I’ll just give you a criteria checkup:
- Pays a dividend: Yes (0.95%)
- Has 5+ years of dividend increases: Yes (37 years)
- Has not frozen dividend for over 8 quarters: Yes
- Has a Chowder number of 10 or more: Yes (10.1)
- Has am EPS payout ratio of less than 70%: Yes (29.61%)
- Pays a dividend monthly or quarterly: Yes (Quarterly; March, May, September, December)
- Has an S&P Quality Ranking of ‘A-‘ or better: Yes (A)
- Has generally increasing earnings over the past 10+ years: Yes
- Is fairly valued/undervalued according to the Normal P/E ratio (blue line): No
- Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): No
There’s one last point I wanted to address: valuation. Clearly, according to FAST Graphs, SHW is overvalued. I even say I didn’t want to buy it in my analysis:
But currently, the company is extremely overvalued, almost by a factor of two. I’m normally all for layering into a stock in order to lower your cost basis. It seems at this point, thought, that an investment in SHW is a guaranteed loss over the medium term as the company reverts to fair value.
But the thing is, I may be wrong, as literally every analyst valuation I’ve seen says the company is downright cheap. Morningstar says the fair value of SHW is $314.00, and S&P Capital IQ has a fair value of $350.30. Most analysts I’ve seen have an average 2015 EPS expectation of around $11.27, which gives us a price target in the mid-$300s. Now I don’t take analysts’ estimates as gospel, but it does strike me as a bit odd that everyone is very closely clustered together, pretty far from my personal expected price point. Even the dividend discount model gives me a fair value of $275.92, assuming the following:
- A discount rate of 12.225%, which is exactly 3/4ths of the historical average annual rate of return with dividends reinvested (source: FAST Graphs)
- A dividend growth rate of 11.17%, the historical annualized DGR since 1985
- A next year’s estimated dividend of $2.98 (today’s annual dividend of $2.68 * (1 + 0.1117), rounded up)
That’s reasonably close to what I paid for SHW, only a 2.67% difference. I feel like I’m missing something here, but these estimates are very interesting to me. I wonder if it’s time to re-evaluate some of my criteria, in order to more precisely pin down a fair value estimate. Just weird that FAST Graphs is so out there, compared to most analysts’ and my own calculations.
What are your thoughts on my valuation criteria? Should I consider revising them? What do you use to determine fair value of a stock?
Disclosure: Long SHW
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