I got into the paint business last week! Sherwin-Williams (SHW) is a 150 year old company selling paints and coatings. I first got interested in Sherwin-Williams 9 months ago, and have been watching the stock since.
A business selling paint sounds boring, but Sherwin-Williams might have one of the best business models in the world. The reason for my interest is that over the past 10 years Sherwin-Williams' annualized return was 17%. Put differently, someone who invested $10,000 in Sherwin-Williams 10 years ago, would have seen that money grow to $50,000 today. The past 20 years, between 1995 and 2016, Sherwin-Williams returned on average 15% per year and the past 30 years, between 1985 and 2016, Sherwin-Williams returned on average 15% per year as well. In other words, if you invested $10,000 in Sherwin-Williams 30 years ago, it would have grown to be over $700,000 today. When it comes to investing, boring can be good. People will always paint things, in good times and bad times, and they don't mind paying extra for quality.
Past performance is no guarantee for future results. I've been waiting to invest in Sherwin-Williams for about 9 months, and finally started half a position last week at $249 a share. The share price of Sherwin-Williams declined by about 21% from its all-time high, in part because of a disappointing third-quarter earnings report. At $249, Sherwin-Williams might not be a screaming buy -- the P/E of 21 remains relatively high. If you're a more patient investor, it might be worth waiting a bit longer. The price could fall further, especially if the Federal Trade Commission blocks the Valspar acquisition or if the market corrects more broadly. At the same time, there is no guarantee the stock will go lower and Sherwin-Williams might not trade 21% of its all-time high for long. If the stock were to drop another 10% or more, I would almost certainly buy more and cost-average into a full position.
The first thing I like to do is study how a company achieved such returns.
Between 2006 and 2016, Sherwin-Williams grew revenues 4% annually from 7.8 billion to 11.7 billion. Earnings grew faster than revenues as the result of profit margins improving from 7.4% to 9.5%. Specifically, earnings grew 6.8% annually from 576 million in 2006 to 1.1 billion in 2016.
Earnings growth of 6.8% isn't something to write home about. Fortunately, earnings growth isn't the whole story. What makes Sherwin-Williams an interesting business is that it gushes cash flow to the tune of 1.1 billion a year on 11.7 billion of sales. The company used its cash flow to buy back 31% of its shares between 2006 and 2016. This has allowed earnings per share to grow by an additional 3.8% annually.
Next we can add in the dividend. Sherwin-Williams has a history of raising its dividend for 38 years. The past 10 years, Sherwin-Williams had an average dividend yield of 1.6%.
So we have 6.8% earnings per share growth as the result of growing sales and margin expansion, and 3.8% earnings per share growth thanks to a reduction in share count. This equates to 10.6% earnings per share growth. Add a 1.6% dividend yield, and investors are looking at 12.2% annual returns. That is a great return, especially for a 150 old business selling paint.
In addition to revenue growth, margin expansion, a significant share count reduction and a small dividend, Sherwin-Williams also saw significant price to earnings (P/E) expansion. In 2006, Sherwin-Williams was trading at a P/E of 14 while it is trading at a P/E of 21 today. On average, the P/E expanded by 4.1% per year. While some of the P/E expansion could be justified by the quality of the sales improving (higher margins), it is fair to say that the P/E got ahead of itself.
The second thing I like to do is evaluate a company's future prospects.
The reason Sherwin-Williams has been so successful over the past decade is because it had all these components working together -- sales growth, margin expansion, share count reduction, a small dividend and a growing valuation. Understanding the different components is important to help us evaluate Sherwin-Williams' prospects.
Because of Sherwin-Williams' healthy cash flow, I believe the company should be able to keep growing revenues (through acquisitions), keep retiring shares, and grow their dividend for the foreseeable future. I'm more concerned about the margins and valuation components. Sherwin-Williams won't be able to improve margins forever -- in fact, an increase in input costs could have negative impact on margins. And despite a 22% drop in price and growing earnings, the P/E remains high at 21.
For illustration purposes, let's assume that Sherwin-Williams' earning per share will grow 6% for the next 5 years instead of the 10.6% it grew the last decade. After five years, earnings per share would grow from $11.16 in 2015 to roughly $14.9 in 2020. Next, let's factor in the possibility for a P/E contraction. Let's say that after five years, the P/E contracted almost 30% from 21 to 15. In this scenario, shares of Sherwin-Williams would be trading at $224 in 2020. This is $20 below today's share price of $244. That said`, the next 5 years a shareholder of Sherwin-Williams will collect something in the order of $25 in dividends for every share owned. This would bring the total return up to $249. I consider this scenario to be pessimistic but certainly in the realm of possibilities.
In a more optimistic scenario, Sherwin-Williams might be able to maintain a 10% earnings per share growth rate at a P/E of 18. Here, we're looking at a 2020 share price of $323, good for an annual compound growth rate of almost 6%.
Needless to say, this is a very rough model. The idea is not to create a perfect model, but to understand a range of possibilities.
While I don't think I will lose money on my investment, I also don't expect that Sherwin-Williams will be a home run in the next 5 years. Why then did I decide to invest? The reason is that I prefer to think in terms of decades, rather than a 5 year horizon. What excites me about Sherwin-Williams is not its prospects over the next 5 years, but its potential for income generation 20 to 30 years from now.
Sherwin-Williams appears to be a well-run company. It has been in business for 150 years and continues to grow at a healthy pace. It has increased dividends each year for the last 38 years. During the past 10 years, the dividend growth rate was almost 13% annually, well above the S&P 500's 10 year average of 4%. Last week Sherwin-Williams announced a 25% increase in its quarterly dividend from $0.67 a share to $0.84. Even with that generous increase, the company's payout ratio -- the percentage of profits it spends on paying out its dividend -- remains low at around 30%.
Sherwin-Williams's starting dividend of 1.3% is not impressive, but its dividend growth rate is. Should Sherwin-Williams continue to increase its dividend by 13% annually, after 20 years, each share would produce $39 in annual income. After 30 years the annual dividend would amount to $132 per share. The yield on cost would be 16% and 54% respectively. Given the low payout ratio, strong share buyback program, and the 30 year track record of 15%+ returns, I believe that could be a possibility. Time will tell. If you plan to hold Sherwin-Williams for 20 to 30 years, I believe it could be among the best stocks for both wealth building and dividend income.
Disclaimer: I'm long SHW with a cost basis of $249 per share. Before making an investments, you should do your own proper due diligence. Any material in this article should be considered general information, and not a formal investment recommendation.
I wanted to share the exciting news that Nasdaq Corporate Solutions has selected Acquia and Drupal 8 as the basis for its next generation Investor Relations Website Platform. About 3,000 of the largest companies in the world use Nasdaq's Corporate Solutions for their investor relations websites. This includes 78 of the Nasdaq 100 Index companies and 63% of the Fortune 500 companies.
What is an IR website? It's a website where public companies share their most sensitive and critical news and information with their shareholders, institutional investors, the media and analysts. This includes everything from financial results to regulatory filings, press releases, and other company news. Examples of IR websites include http://investor.starbucks.com, http://investor.apple.com and http://ir.exxonmobil.com -- all three companies are listed on Nasdaq.
All IR websites are subject to strict compliance standards, and security and reliability are very important. Nasdaq's use of Drupal 8 is a fantastic testament for Drupal and Open Source. It will raise awareness about Drupal across financial institutions worldwide.
In their announcement, Nasdaq explained that all the publicly listed companies on Nasdaq are eligible to upgrade their sites to the next-gen model "beginning in 2017 using a variety of redesign options, all of which leverage Acquia and the Drupal 8 open source enterprise web content management (WCM) system."
It's exciting that 3,000 of the largest companies in the world, like Starbucks, Apple, Amazon, Google and ExxonMobil, are now eligible to start using Drupal 8 for some of their most critical websites. If you want to learn more, consider attending Acquia Engage in a few weeks, as Nasdaq's CIO, Brad Peterson, will be presenting.
Last week, we launched a new version of Acquia Lift, our personalization tool. Acquia Lift learns about your visitors' interests, preferences and context and uses that information to personalize and contextualize their experience. After more than a year of hard work, Acquia Lift has many new and powerful capabilities. In this post, I want to highlight some of the biggest improvements.
To begin, Acquia Lift's new user interface is based on the outside-in principle. In the case of Acquia Lift, this means that the user interface primarily takes the form of a sidebar that can slide out from the edge of the page when needed. From there, users can drag and drop content into the page and get an instant preview of how the content would look. From the sidebar, you can also switch between different user segments to preview the site for different users. Personalization rules can be configured as A/B tests, and all rules affecting a certain area of a page can easily be visualized and prioritized in context. The new user interface is a lot more intuitive.
Having a complete view of the customer is one of the core ideas of personalization. This means being able to capture visitor profiles and behavioral data, as well as implicit interests across all channels. Acquia Lift also makes it possible to segment and target audiences in real time based on their behaviors and actions. For example, Acquia Lift can learn that someone is more interested in "tennis" than "soccer" and will use that information to serve more tennis news.
It is equally important to have a complete view of the content and experiences that you can deliver to those customers. The latest version of Acquia Lift can aggregate content from any source. This means that the Acquia Lift tray shows you content from all your sites and not just the site you're on. You can drag content from an ecommerce platform into a Drupal site and vice versa. The rendering of the content can be done inside Drupal or directly from the content's source (in this case the ecommerce platform). A central view of all your organization's content enables marketers to streamline the distribution process and deliver the most relevant content to their customers, regardless of where that content was stored originally.
Content can also be displayed in any number of ways. Just as content in Drupal can have different "display modes" (i.e. short form, long form, hero banner, sidebar image, etc), content in Acquia Lift can also be selected for the right display format in addition to the right audience. In fact, when you connect a Drupal site to Acquia Lift, you can simply configure which "entities" should be indexed inside of Acquia Lift and which "display modes" should be available, allowing you to reuse all of your existing content and configurations. Without this capability, marketers are forced to duplicate the same piece of content in different platforms and in several different formats for each use. Building a consistent experience across all channels in a personalized way then becomes incredibly difficult to manage. The new capabilities of Acquia Lift remedy this pain point.
In addition, we've also taken an API-first approach. The new version of Acquia Lift comes with an open API, which can be used for tracking events, retrieving user segments in real time, and showing decisions and content inside of any application. Developers can now use this capability to extend beyond the Lift UI and integrate behavioral tracking and personalization with experiences beyond the web, such as mobile applications or email.
I believe personalization and contextualization are becoming critical building blocks in the future of the web. Earlier this year I wrote that personalization is one of the most important trends in how digital experiences are being built today and will be built in the future. Tools like Acquia Lift allow organizations to better understand their customer's context and preferences so they can continue to deliver the best digital experiences. With the latest release of Acquia Lift, we've taken everything we've learned in personalization over the past several years to build a tool that is both flexible and easy to use. I'm excited to see the new Acquia Lift in the hands of our customers and partners.
The first half of the presentation I provided a technical update on Drupal 8. I showcased some of the big changes in Drupal 8.2 such as the settings tray, REST API improvements, migration tool improvements, and easier to use block placement. I also talked about how we've transformed Drupal 8 for continuous innovation. I'm super excited about our improved development process and release cycle, as it helps us ship innovative updates to Drupal 8 faster and with a much easier upgrade path.
The second half of the talk focused on "The why" of Drupal, and asked an important question for all of us to think about: what is Drupal's collective purpose? In addition to me talking about my own purpose, my team interviewed Drupal people around the world about their passion and purpose.
I featured a lot of interviews with Drupalists. If you're interested in viewing their individual videos, they're now available on my YouTube channel:
When I was on vacation in Italy this summer, I had no internet, which gave me a lot of time to think. Some of that time was spent reflecting on why I do what I do. I have been working on Drupal for over 15 years and on Acquia for almost 10 years. The question of what gives me meaning and purpose has changed drastically over that time.
I started Drupal because I wanted to build a website for myself and a few friends. In the early days of Drupal, I was obsessed with the code and architecture of Drupal.
As I wrote in 2006: "I focused completely and utterly on creating fewer and fewer lines of more elegant code.". I wanted Drupal to be pure. I wanted the code to be perfect. For Drupal to be architected in the right way, I had to rewrite it multiple times and strip away anything that wasn't necessary – I couldn't imagine preserving backwards compatibility as it meant we had to drag along a lot of historical baggage. My mission in the early days was to keep the platform fast, clean and on the leading edge of technology.
As time passed and Drupal started growing, my role evolved. More people became involved with Drupal, and I thought more about scaling the community, including our tools, processes and culture. I started to focus on building the Drupal Association, promoting Drupal, handling trademark issues, and last but not least, setting the overall direction of the project. In the process, I started to worry less about achieving that perfect vision and more about the health of the community and collaborating on a shared vision.
While I miss programming, I have come to accept that I can't do everything. Every day when I wake up, I decide where I want to focus my energy. My guiding principle at this time in my life is to optimize for impact. That means enabling others versus doing much programming myself.
While in Italy, I decided to make a list of the moments in Drupal's history that stand out as particularly meaningful or purposeful. I started to discover some patterns in these moments, and ended up sorting them into two groups. Here is the first set:
All of these moments suggest that my purpose is self-transcendent – I get meaning when my work matters more to others than it does to me. Organized into radiating circles, the impact on each of these groups gives me purpose: individual Drupalists, the Drupal community, Drupal end users, and the open web. This is why I've become so passionate about things like usability, internationalization and accessibility over the years.
I know it's not just me; my team interviewed many other people that have the same feelings of finding meaning when their work results in life-changing outcomes. One great example is "Franck" Seferiba Salif Soulama, who hopes that training more young people in Drupal can lift people from Burkina Faso, Africa out of poverty. He wants to provide them job opportunities so they don't have to leave their country. Other examples are Drew Gorton or Ronan Dowling. There are many people like Franck, Drew or Ronan around the world that have a positive domino effect on others.
The second group of moments I wrote down weren't necessarily self-transcendent, but still gave me purpose. Here are a few examples:
Many of us find meaning when the hard and uncomfortable work results in life-changing outcomes for others. Not only does this type of work provide purpose, some people believe it is the recipe for success. For example, Angela Lee Duckworth's TED talk on grit applies directly to the work that is done by Drupal's maintainers.
Hearing all of these inspirational stories makes me think: How we can attract more people to the project, but do so in a way that ensures we share our core values (like giving back)? While there are no straightforward answers to this question, there are many organizations that are doing great things in this area.
One example is the Drupal Campus Ambassador Program which hopes to appoint ambassadors in every university in India to introduce more students to Drupal and help them with their job search. While at Drupalcon India earlier this year, I met Rakesh James, who has personally trained 600 people on Drupal!
Another example is the Drupal apprenticeship program in the UK, which focuses on recruiting new talent to the Drupal community. Participants get an extensive Drupal bootcamp to help them with their job search. Many of these apprentices are disadvantaged young people who have great talent and aptitude, but might be lacking the traditional route or access to a meaningful career path.
I'd love to take programs like these global – they instill our values, culture and a sense of purpose to many new people. If you know of similar initiatives, or have ideas to share, please do so in the comments section.
Based on my own introspection, and hearing from amazing Drupalists from around the world, I truly believe that Drupal is fueled by a collective sense of purpose that sets us apart from other open source software communities and organizations. We need to keep this purpose in mind when we make decisions, especially when the going gets tough. What is your sense of purpose? And how can we scale it around the world?
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