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Is Sherwin-Williams’s Debt Getting Better or Worse?

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Sep. 27 2018, Updated 9:42 a.m. ET

Sherwin-Williams’s debt

At the end of the second quarter, Sherwin-Williams’s (SHW) debt was at $10.37 billion—marginally lower compared to the debt at the end of 2017. The debt includes short-term debt, the current portion of long-term debt, and long-term debt. The company’s debt remained more or less range bound until 2016. In 2017, Sherwin-Williams’s debt rose more than five times due to issuing new debt to finance its Valspar acquisition.

Sherwin-Williams’s debt has declined from the all-time high of $11.o billion. The trend is expected to continue as Sherwin-Williams repays the debt with free cash flows. The decline in Sherwin-Williams’s debt improved the company’s DE (debt-to-equity) ratio.

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DE ratio

At the end of the second quarter, Sherwin-Williams’s DE ratio was 277x—high compared to the industry standard of 0.98x. Although the ratio is high, it shouldn’t concern investors as long as the debt generates positive returns after covering the cost of debt. PPG Industries (PPG), RPM International (RPM), and Axalta (AXTA) have DE ratios of 1.04x, 1.33x, and 2.98x, respectively. Except for Axalta, Sherwin-Williams’s DE ratio is higher than its peers.

Sherwin-Williams could consider opportunities to reduce its high debt through its available free cash flows. The company has suspended its share repurchase program in order to reduce its overall debt. Next, we’ll discuss the trend in Sherwin-Williams’s free cash flows. We’ll also discuss the company’s ability to service the debt.

Investors could hold Sherwin-Williams indirectly by investing in the Materials Select Sector SPDR Fund (XLB). DIA has invested 5.4% of its portfolio in Sherwin Williams as of September 25.

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