Sherwin-Williams’s free cash flow
In the previous part, we discussed Sherwin-Williams’s (SHW) debt position. In this part, we’ll discuss the company’s free cash flow and see if it’s strong enough to repay the debt. Sherwin-Williams has been generating strong free cash flows. Since 2012, Sherwin-Williams has generated an average free cash flow of ~$835 million per year. The company’s free cash flows have grown at a compound annual growth rate of 18.7%.
Sherwin-Williams’s free cash flow is determined after the dividend is paid. Generally, dividends are paid out of the free cash flows. Sherwin-Williams has already indicated that reducing the debt out of the free cash flow is one of its top priorities. As a result, the company has temporarily suspended its share repurchase program. Positive synergy gains from the Valspar acquisition could boost the company’s free cash flows. Sherwin-Williams’s debt should improve significantly in the upcoming years.
From 2012 to 2017, Sherwin-Williams’s free cash flow had an average growth of 25.3%. PPG Industries (PPG), RPM International (RPM), and Axalta’s (AXTA) free cash flows had an average growth of 6.5%, 9.1%, and 66.5%, respectively. Except for Axalta, Sherwin-Williams’s free cash flow has a stronger average growth compared to its peers.
Investors could hold Sherwin-Williams indirectly by investing in the Invesco S&P 500® Equal Weight Materials ETF (RTM). RTM has invested 5% of its portfolio in Sherwin-Williams as of September 25.
Next, we’ll discuss Sherwin-Williams’s ability to service its debt.