RPM International: Top Income Stock Pick for 2011

| About: RPM International (RPM)
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By Louis Basenese

Six months ago, readers lampooned me when I suggested that all the talk about a double-dip recession amounted to, well, nothing more than talk.

But vindication is sweet. As I write, the majority of the 40 economic indicators tracked by Bespoke Investment Group continue to beat expectations. And U.S. GDP growth forecasts are universally being revised upwards.

Clearly, the economy is on the mend, not teetering on the brink of another slowdown. And I’m convinced that this makes it the perfect time for conservative, income-focused investors to scoop up shares of RPM International (NYSE: RPM).

Here’s why…

Coat Your Portfolio With 2011 Profits

Based in Medina, Ohio, RPM makes paints, sealants, adhesives, protective coatings and roofing systems. Now, I’ll be the first to admit that this is hardly a glamorous or flashy business.

But quite frankly, who cares!

Boring businesses make money, too. Lots of it, which affords them the opportunity to return it to shareholders. And at the end of the day, if you’re a conservative investor in or near retirement, that’s all you want. A nice steady, reliable dividend-payer with the prospect of modest capital appreciation.

And I can assure you that RPM fits the bill.

The company operates two main business segments – consumer products (32% of sales) and industrial products (68% of sales). And chances are, if you’re a do-it-yourselfer, you’ve bought its products in the past. RPM owns the well-known RustOleum, DAP and Zinsser brands found in every major home improvement store.

And RPM’s success with these products is unquestionable…

  • Over the last 25 years, the company has delivered nothing but steady growth – sales and earnings have increased at an average of 12% per year.
  • It’s paid (and increased) its dividend for 37 years and counting. Only 56 other companies out of 19,000 can boast the same commitment to shareholders.
  • And the solid long-term results and consistent dividend payments have helped spark a share price increase of about 10% per year over the last decade.

And while “past performance is no guarantee of future results” in the financial world, here’s why I fully expect more of the same from RPM moving forward…

Looking from the Bottom Up, Not the Top Down

To pretend that the recession didn’t impact RPM’s business would be foolish. After all, the company is tethered to both the residential housing market and the commercial construction market – both of which have endured epic downturns.

But the worst is behind us. I mean, you don’t hear many people talking about the bubbles in the residential housing or the commercial construction markets anymore, do you?

Nope. We’re clearly closer to a bottom than a top. Thus, an uptick in demand for RPM’s products is just around the corner. But don’t just take my word for it…

RPM Battling Serious Headwinds… But Set to Blast Through

In the company’s annual report, management makes no bones about the headwinds facing its business. That includes “stubbornly high levels” of unemployment, “continued weakness in commercial construction” and what will likely be a “serious and long-lasting” impact from the Gulf of Mexico oil spill.

Nevertheless, the executives point out that, “RPM’s sustainable business model has been proven in good times and bad, which gives us confidence in expecting improved financial performance in the 2011 fiscal year.”

Specifically, they’re calling for a 10% increase in earnings. And a quick review of the most recent results – released just this morning – suggests that improvement is already materializing in two ways…

  1. Net Sales: RPM enjoyed a net sales increase of 5.3%, while net income ticked 2.3% higher. Not barnburner numbers, but definitely a step in the right direction.
  2. Market Share: I’m also encouraged by the fact that RPM’s “consumer lines maintained or grew their market share.” Market share gains during tough economic times always lead to stronger profits once the recovery takes root.

So as the U.S. economy gets back on solid ground, I fully expect RPM’s sales and profits to accelerate, too. And its share price should naturally follow suit.

But please don’t think that RPM is merely a play on a rebounding economy. It’s not…

Three Global Growth Trends That Will Power RPM’s Business

RPM benefits from three compelling growth trends that will continue, no matter what happens with the global economy.

1. Global Energy Demand: Thanks to population growth, global power generation needs to increase by as much as 50% over the next two decades. RPM directly benefits from this, as its products are diversified across all power generation sources – oil, gas, coal, nuclear and renewables.

2. Infrastructure Spending: Globally, it will take more than $41 trillion to repair and/or build highways, bridges and electric, water and sewer utilities between now and 2030. RPM boasts a lineup of products used in such applications. These include Epoplex roadway stripping, Vandex waterproofing products and Carboline high-performance steel coatings.

3. International Expansion: RPM currently books 71% of its sales in North America and another 20% in Europe. But there’s a world of growth available in emerging markets, particularly in Asia and South America – and RPM is rapidly expanding into these markets. Each region accounts for less than 3% of total sales, so there’s much more potential growth in the pipeline.

And rest assured, RPM possesses the financial strength to pursue each growth opportunity…

RPM’s Debt Diet and Appetizing Dividend

The company didn’t overeat at the debt buffet. RPM’s debt-to-equity ratio checks in at a conservative 44%. Plus, the majority of the debt that RPM carries on its books – some 97% – is fixed-rate debt. So when interest rates inevitably rise, a spike in interest expenses won’t suck up cash that could be used for funding growth instead.

Of course, while we wait for these catalysts to kick in, RPM currently pays an annual dividend of $0.84 per share – a 3.8% yield. I consider it to be a safe and reliable dividend, too.

Why? Because as I noted, RPM has paid (and increased) its dividend through thick and thin over the last 37 years. And also because RPM’s dividend payout ratio checks in at just 59%.

A recovering economy… compelling growth opportunities… a safe and growing dividend… and a reasonable valuation (shares trade for just under 14 times forward earnings)… combine to make RPM my top income pick for 2011.

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