Monday, November 10, 2008
(Cont'd from above)...

Jim (cont'd):   

PPG Industries Inc. (PPG) has taken a true nosedive here. This is taken a nearly 50% haircut from its 52-week high of $72.21, to around $46. It's only a couple of points above its 52-week low. It's pathetic.

The company used to have more of an auto business, which is just... as we know... I mean, anything related to autos, other than my incredibly cool car, is absolutely awful. And now, anything linked to auto manufacturing is unfairly linked in and crushed, even if you once were in auto, and you're not anymore. That's what PPG's auto business makes up, a measly 4% of its sales.

The last time PPG sported a 4.5% yield was all the way back on February 13th of 2003. Now, get this... Had you pulled the trigger then... well, you would have been up over 29%, in a really crummy market, over the next year... and that includes the dividend.

This is a company that has raised its dividend every year since 1972, and we've had some nasty, nasty periods during that. So you can count on the dividend going higher when the stock recovers and, therefore, the yield going down... But, unlike other accidental high yielders, that don't raise their dividends, this one's got both going for it.

PPG last raised its dividend last month. Talk about a sign of confidence. You tend not to cut your dividend right after you raise it, because you wouldn't raise it without some visibility toward future earnings. And, in this market where you're up 200, then down 100... I mean, you're looking for some sort of totem, you know... The dividend is what I give you. The yield on a stock like PPG gives you a cushion.

As the share price goes lower, the yield (percentage) increases, and the stock gets more attractive. Simple. It's algebraic.

But the dividend also means that, even if the stock does nothing, you can make money... a lot of money... as long as you reinvest the dividend payments in the stock, so they'll compound over time. I want you to recall "the rule of 72" which applies to compound interest and compounding reinvested dividends. Divide 72 by the yield, and that tells you how long it will take your investment to double from the yield alone, as long as you reinvest your dividends.

In PPG, with a 4.65% yield, you would double your money every 16 years, simply by reinvesting the dividend... even if the stock did nothing... In the worst case scenario, PPG goes lower and you can buy more with an even higher yield. I know, Rule of 72... really boring... but it really matters! Because, while I am not bullish for the foreseeable future... when you start talking about a period of 10 or 20 or 30 years... maybe your retirement is out there... maybe your kid was just born... or you're in school... the power of that compounding dividend becomes so obvious, that the case must be made by someone... and I'll do it right here... for the dividend alone. Especially when cash barely compounds, because of the incredibly low short-term rates that are upon us... less than a quarter of PPG's yield, and with a much higher tax rate. This is the steal...

PPG has long been one of our favorite specialty chemical names. We know we can buy it as long as it goes lower, because we've done the homework... That's what you've got to do. You can't just say, hey, listen, it's fine.

We like PPG's end business, and we especially like the fact that it's got $600 million in cash. Some of that could go to a new share buyback program... something that makes sense when your stock's been knocked down as hard as PPG's has. Although I'd still rather see PPG pour that money into a dividend, not a buyback.

Here's why I like these industrials...

Unlike so many of the financials, which bought back high and are now issuing (more stock offerings to raise money) low, PPG can take advantage of its deeply-depressed stock price, and didn't pull one of those moronic moves.

PPG's doing surprisingly well, given that it's an industrial...

In the third quarter, sales in its performance coating business - and that's a big business for them... they make solar cells and windmills. This is no longer the old PPG. It's a definite winner under President-elect Obama. That grew 28%. Commodity chemicals... you usually think that's supposed to be bad right... that grew by 25%, and could do very well now that oil... the fundamental of feed stock... has gone down so much. And natural gas, PPG's main input... that's what they use to make a lot of the stuff... is down 44% from July alone... $12.84 to $7.19...

Alright. Back to PPG's segments... While sales of PPG's glass business were flat... and that is not good, okay... that is not good... it's profits from the glass business, which includes plain old glass and fiberglass for windmills, increased by 51%! That is fabulous. PPG sold its automotive glass and services business. That's the one that was killing them, right. That's how they decreased exposure to the black hole sector of our economy...

Then they bought this thing called Sigma Kalon (?)... It makes the coatings for windmills, offshore platforms, petrochemical plants... Smart! Because the demand is not going away, just because the price of oil is not going down.

One third of its business is from Asia, and I've been looking all day for places to play that gigantic Chinese communist infrastructure... and, as far as I'm concerned... you know I like CAT. I went over that last week... But, if you want to play the Chinese infrastructure boom (expected now, given today's announced $586 billion infusion by the Chinese government), PPG could be an incredible beneficiary.

PPG is building a presence in optical chemicals, making the lenses for prescription glasses. According to a great piece of research from Cramer-fave, chemical analyst, Frank Mitch at BB&T, about 18% of prescription lenses sold in the U.S. are made by PPG... You thought they made the windshields... they make these kinds of windshields (pointing to his eyes)... Meanwhile, PPG's optical market share in Europe is only in the mid-single digits, and it's got more room to grow. How about the commodity chemical business? It's doing well too. 10% of PPG's business comes from chloracholas... that's a type of chemical that's in tight demand. It includes chloralkali. Its capacity has been shut in the U.S. and imports have fallen.

Plus, this company is a big beneficiary of the commodity collapse, lower raw materials. I'm giving you all this, because I want you to know that that dividend to me is very safe. PPG is a company that can make it through the lean years and support the dividend, while the economy takes its time turning around.

Alright, people think it's going to earn $9.76 (per share) in cash flow, $5.31 in earnings... God, this stock is cheap... And it's been cut in half. I don't know. I don't understand it. I think its earnings... All it has to do is earn $2.14 to cover that dividend. Remember, it's accidentally high... it's an accidentally-high yielder, at 4.65%.


The Bottom Line!:      PPG Industries Inc. (PPG) looks mighty attractive now that it's yielding an accidentally high 4.65%... because its share price has been brutalized. I like it better than ever. It's a broken stock... with a great dividend to boot... not a broken company. And I think it's a buy, buy, buy... not just because it is indeed a China play.

[verbatim recap]

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