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Sherwin-Williams Inc. $51 – New York symbol SHW

SHERWIN-WILLIAMS INC. $51 (New York symbol SHW; WSSF Rating: Above average) got as high as $54 in February 2006, but dropped to $37 after a Rhode Island court ruled that the company and two other paint makers are liable for harm caused by lead-based paints. Sherwin stopped making lead paint over 30 years ago, but it and the two other companies could conceivably have to spend over $1 billion to clean up about 250,000 homes in Rhode Island alone. That’s a sizable expense considering that Sherwin earned $463.3 million or $3.28 a share in 2005.

However, the court exempted Sherwin from punitive damages. That helped the stock recapture much of the big drop. The stock also got a boost from Sherwin’s improving earnings, which will probably rise to $3.85 a share in 2006. It now trades at just 13.2 times that estimate. The improving earnings also let the company raise its quarterly dividend 22.0%, from $0.205 a share to $0.25. The new annual rate of $1.00 yields 2.0%.

The Rhode Island decision may encourage lead-paint lawsuits in other states, which adds to Sherwin’s risk. However, the paint industry has won over 40 of these cases in the past 20 years, so there is a good chance that Sherwin’s appeal could succeed.

Sherwin-Williams is a hold.

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