Theoretical investor returns under varying dividend yields and profit growth rates

A brief theoretical calculation—to help set expectations. First, the conclusion: - If a company’s profits grow annually by 5% and its dividend yield is 5%, an investor’s long-term return is 10%. - If profits grow annually by 7% and the dividend yield is 5%, the long-term return is 12%. - If profits grow annually by 5% and the dividend yield is 7%, the long-term return is also 12%. This is actually intuitive: Assuming a constant payout ratio, the growth rate of book value per share matches the profit growth rate. If valuation remains unchanged, the stock price growth rate equals the book value per share growth rate. Thus, the investor’s theoretical return = dividend yield + profit growth rate. What corresponding P/B, P/E, and ROE levels does this imply? Let’s illustrate with an example: Case: 5% annual profit growth + 5% dividend yield - With annual profit growth of 5% and a constant payout ratio, dividends per share also grow 5% annually. Since the dividend yield remains unchanged, the stock price must likewise rise 5% annually. - Assume a payout ratio of 70%. - Let initial book value be B. Then current-year earnings = B × ROE; after dividends, book value becomes B + B × ROE × (1 − payout ratio). - Next year’s earnings = [B + B × ROE × (1 − payout ratio)] × ROE = B × ROE × (1 + profit growth rate). - Dividing both sides by B and then by ROE, and simplifying, we obtain: 1 + ROE × (1 − payout ratio) = 1 + profit growth rate. - Therefore: ROE = profit growth rate ÷ (1 − payout ratio) = 0.05 ÷ 0.3 = 16.66%. Alternatively, note that profit growth rate = ROE × (1 − payout ratio). This makes intuitive sense: only the retained portion of ROE contributes to book value growth. Let stock price be P. Then dividends = P × dividend yield, and earnings per share = (P × dividend yield) ÷ payout ratio. Hence: P/E = P ÷ EPS = P ÷ [(P × dividend yield) ÷ payout ratio] = payout ratio ÷ dividend yield. Since P/B ÷ P/E = ROE, it follows that P/B = ROE × P/E = ROE × (payout ratio ÷ dividend yield). So: P/B = 16.66% × 0.7 ÷ 0.05 = 2.33. Alternatively, dividend yield = (ROE × payout ratio) ÷ P/B. This too is intuitive: the ROE portion allocated to dividends represents a ratio relative to book value per share, whereas dividend yield’s denominator is the stock price—i.e., book value per share × P/B. In summary: a company with ROE = 16.66%, P/B = 2.33, P/E = 14, and dividend yield = 5% can sustain that 5% yield while delivering 5% annual profit growth (and thus 5% annual dividend growth per share), assuming stable valuation.

Dividend Champion RPM: Robust cash flow as an inflation hedge

• CPG (Construction Products Group): Core businesses include manufacturing and selling construction sealants and adhesives, coatings and chemicals, roofing systems, concrete admixtures and repair products. Also provides building envelope solutions, insulated cladding, flooring systems, and weatherproofing solutions. In Q3 FY2022, segment sales rose 21.7% year-on-year to $482 million, driven by 23.2% organic growth and a 2.2% contribution from acquisitions. Benefits stemmed from innovative building envelope solutions and differentiated repair offerings. • PCG (Performance Coatings Group): Offers high-performance flooring solutions, corrosion-control and fire-retardant coatings, infrastructure repair systems, fiberglass-reinforced plastic grating, and drainage systems. In Q3 FY2022, segment sales increased 19.6% year-on-year to $270.9 million, primarily due to 17.8% organic growth and a 3.4% contribution from acquisitions. • Consumer Group: Produces and sells rust inhibitors, specialty and decorative paints, caulks and sealants, primers, cement cleaners, floor sealers, woodworking paints, sandpaper and other abrasives, and other branded consumer products. In Q3 FY2022, organic sales grew 3.6%, while total segment sales rose 2.9% year-on-year to $491.6 million. • SPG (Specialty Products Group): Manufactures and sells industrial cleaners for pharmaceutical and food industries, equipment for repair services, colorants, nail enamels, exterior coatings, edible coatings, specialty OEM (“original equipment manufacturer”) glazes, and other specialty coatings. Segment sales totaled $189 million, up 11.9% year-on-year. 03 Financial Data ① Revenue and Profit • In Q3 FY2022, RPM achieved record net sales of $1.43 billion, up 13.0% from $1.27 billion in the prior-year quarter. Operating profit reached $500 million, up 5.6% from $470 million a year earlier. • Frank C. Sullivan, RPM’s Chairman and CEO, stated that RPM employees persistently navigated unprecedented supply-chain challenges and Omicron-related disruptions and inflationary pressures. Despite heightened difficulty versus last year, RPM delivered record EBIT and record sales in Q3. In September of last year, RPM rapidly expanded internal resin production capacity at its newly acquired Texas manufacturing facility to swiftly address supply-chain constraints. Moreover, RPM’s continued investment in its fastest-growing business areas accelerated growth in high-performance construction and coating systems. Construction and industrial maintenance activity remained strong, energy markets began rebounding, and consumer takeout demand stayed robust. • In Q3 FY2022, RPM’s U.S. revenue accounted for 69% of total revenue—the company’s primary income source. RPM markets its diverse product lines directly to contractors, distributors, and end customers, most of whom are based domestically in the United States. • In Q3 FY2022, RPM’s European revenue represented 17% of total revenue. Europe serves as the primary overseas market for RPM’s Consumer and SPG segments.

Does Dividend Increase Change The Bull Case For RPM International (RPM)?

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RPM International's board approved a 5.6% quarterly dividend increase to $0.57 per share and appointed Jeffrey D. Rowe to its board. These moves signal enhanced operational expertise and capital return discipline amidst moderate growth forecasts.