Company Description: RPM International Inc. makes specialty coatings and products for the structural waterproofing and corrosion control markets, as well as products for the consumer, do-it-yourself and hobby markets.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
RPM is trading at a premium to all four valuations above. Since RPM’s tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 76.9% premium to its calculated fair value of $10.31. RPM did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling 4-yr Div. > 15%
RPM earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. RPM earned a Star as a result of its most recent Debt to Total Capital being less than 45%, and earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1969 and has increased its dividend payments for 36 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to > MMA
The NPV MMA Diff. of the $302 is below the $500 target I look for in a stock that has increased dividends as long as RPM has. The stock’s current yield of 4.44% exceeds the 3.9% estimated 20-year average MMA rate.
Other: RPM is a member of the Broad Dividend Achievers™ Index. Historically, RPM has been able to generate steady operating earnings and free cash flow growth with its diverse product offerings and varied end-markets. The company has maintained its competitive advantages via strong brand identity, high entry barriers, patents, and a good reputation. Risks include outstanding asbestos-related lawsuits, weaker consumer spending and industrial demand and higher raw material costs.
Conclusion: RPM did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks RPM as a 3 Star-Hold.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $16.26 before RPM’s NPV MMA Differential rose to the $500 that I like to see for a stock with 36 years of consecutive dividend increases. At that price the stock would yield 4.98%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 2.5%. This dividend growth rate is higher than the the 1.3% used in this analysis, thus providing no margin of safety. RPM has a risk rating of 2.25 which classifies it as a medium risk stock.
RPM has a good Free Cash Flow Payout at 49%, and an acceptable Debt To Total Capital at 45% and a good dividend yield of 4.44%. However, with a buy price of $10.31 and a NPV MMA Diff. below my target, I will wait for a more opportune time to initiate a position. For additional information, including the stock’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in RPM (0.0% of my Income Portfolio).
What are your thoughts on RPM?
This article originally appeared on The DIV-Net September 21, 2009.