This article originally appeared on The DIV-Net June 14, 2010.
Linked here is a detailed quantitative analysis of RPM International Inc. (RPM). Below are some highlights from the above linked analysis:
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 discount to only 3.) above. Since RPM’s tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 21.8% premium to its calculated fair value of $15.33. 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. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. RPM 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 37 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
RPM earned a Star in this section for its NPV MMA Diff. of the $548. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as RPM has. The stock’s current yield of 4.37% exceeds the 4.02% estimated 20-year average MMA rate.
Other: RPM is a member of the Broad Dividend Achievers™ Index.
Conclusion: RPM did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks RPM as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $19.12 before RPM’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 37 years of consecutive dividend increases. At that price the stock would yield 4.26%.
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 2.9%. This dividend growth rate is less than the 3.2% used in this analysis, thus providing a significant margin of safety. RPM has a risk rating of 1.50 which classifies it as a low risk stock.
Historically, RPM has relied on its diverse product offerings to generate consistent free cash flow over the economic cycle. The company has competitive advantages in its coatings markets based on its strong brand identity, high entry barriers, patents and reputation. However, I have concerns about outstanding asbestos-related lawsuits and its current valuation. RPM is trading well above my buy price of $15.33, so for now I will remain on the sidelines. 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 (0.00% of my Income Portfolio). See a list of all my income holdings here.
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