Best practice: how they do it at RPM

Apr 01, 2008
<p>RPM has found popularity among retail investors; places huge importance on a hard copy annual report; and successfully works with the sell side to build shareholder targetting models</p>

Like the paint it makes, RPM is spread thinly but widely across the world. Its brands, such as Rust-Oleum, have more recognition than their parent company and are as essential to the world of manufacturing and construction as wheels are to a car.

RPM began 60 years ago as Republic Powdered Metals in Cleveland, Ohio. For many years it was a family company – and even now the president is the grandson of the founder, Frank Sullivan.

When Sullivan senior sold the first stock in 1964, he restricted purchases to Ohio residents; it was only five years later that RPM launched nationwide on the NYSE. It became the holding company for a worldwide network of subsidiaries, each independent enough to ward off asset-strippers, and has been compared to a low-cost mutual fund for specialty chemicals and specialty companies.

The family ethos has inoculated the firm against the fatal fads of Wall Street, and it has paid dividends – literally – for the shareholders and the company. After Black Monday in 1987 trashed RPM’s value from $17 to $10, the 14,000 individual holders not only held firm but also saw a bargain and bought more, returning the firm to its pre-crash level within a year.

As a result, RPM goes the distance to woo and retain retail investors, not only paying dividends but also increasing them annually for the last 34 years. Executive vice president and chief administrative officer Kelly Tompkins explains that ‘the ability to pay an increasing dividend over so long a period suggests the company has a solid ability to generate cash flow year in and year out, irrespective of economic conditions. Retail investors realize after Enron that companies can do a lot to manipulate GAAP earnings, but cash is cash, and a very significant proxy for the health of a company – and what better proxy for cash than a steady and increasing dividend?

‘For an individual investor, our yield – currently over 3 percent – is very attractive. And with the dividend reinvestment program (DRIP) the retail investors get the sheer appreciating power of compounding. If someone had held a share for 20 years, he or she would have had a 20 percent yield on the original investment by now.’

Getting the story out
Tompkins’ role is ‘a little bit of this, a little bit of that’ – a fitting position given RPM’s complexity as a publicly traded holding company for a host of worldwide subsidiaries. ‘I have executive oversight of all the professional functions that go with being a public company,’ he explains. ‘The CFO, internal audit director, IR function and legal function all report to me and my colleague. Ronald Rice, the COO, looks after all operational issues.’

Kathie Rogers, manager of IR, reports to the CFO, but works closely with Tompkins on IR. With the aid of the CEO and the CFO, they all spread themselves around without diluting the message, Tompkins says. Between them they do the full range of one-on-ones and sell-side conferences, at home and abroad. RPM is rare in having senior executives, including current president Frank Sullivan himself, turn up to man the booths at retail investor conferences.

‘We always felt having a sizable percentage of investor clubs or individual holders is good for us,’ Tompkins says. ‘They tend to be longer-term holders and promote stability in the shareholder base.’

As well as regular meetings with the retail investor base, RPM produces a glossy quarterly shareholders’ report. Tompkins says RPM has considered dropping it as an economy measure, but in the end decided it was too important to the retail holders. ‘A lot of our individual holders are senior citizens, retirees who may not be comfortable enough with the internet to go online to download the 10Q,’ he notes. ‘The hard copy not only has the earnings release, but also provides that little extra touch they appreciate.’

Talking to the masses
Indeed, the report is a ‘core part of the corporate communications strategy’ and, in the best IR way, made it a two-way channel in 2007, when the quarterly and annual reports contained mail-in cards. ‘We invited investors to ask questions, comment on the company or make suggestions, and thousands of them did – happily, many of them along the lines of, Keep up the good work,’ Tompkins reports.

RPM also uses its reports to advertise its DRIP, to which around 87 percent of the firm’s individual holders subscribe, and the 2006 annual report won the award for best annual report in the small to mid-cap range at the IR Magazine US Awards last year.

The firm always attends the two big money shows in Las Vegas and Orlando, where thousands of investors assemble looking for a safe bet. ‘There is a booth for each company, and we have the CAO, CFO and occasionally the CEO along with Kathie,’ says Tompkins. ‘A presence by senior management is much appreciated.’

Indeed, RPM’s annual meeting is tinted with the folksy shades of Warren Buffett: it draws nearly 1,000 investors who are entertained by local high school choirs, enlightened by management discussion of the results and enriched with free samples.

‘It’s an attitude, a continued and dedicated effort to stay at the front of the minds of retail holders,’ explains Tompkins. ‘Many companies find it easy to avoid the effort, and don’t see a justification for the investment of time and energy, but we do.’

Of course, RPM doesn’t neglect institutions or analysts, either. Tompkins’ position as CAO and his role as lead litigator on asbestos claims make him a huge IR asset. As one analyst says, ‘It’s a trade-off. Kathie has more time to respond promptly, but Kelly has the deep information about almost all aspects of the company.’

The company follows best IR practice for all stockholders with its constant updates on potential litigation liabilities. Indeed, when RPM won the IR Magazine Award for best annual report, its accolade was that it ‘used plain talk to communicate where the firm has been and where it is going. The CEO didn’t try to hide the company’s problems, but explained what they were and how he was dealing with them.’ This is equally true of the quarterly reports and other releases.

Balancing act
That allays investor fears, against which Tompkins also highlights the inherent hedging in the company’s product mix. Around 60 percent of its $3.5 bn revenue is from industrial markets, whether it’s maintenance or repair spending. On the consumer side its home improvement products sell at Lowe’s, Home Depot, Wal-Mart stores, and so on. ‘That operates on a different cycle from the industrial and, within that, there’s a balance between early and late-cycle construction and specialty chemical products,’ Tompkins says.

Reflecting its concerns over the decades, RPM works closely with the sell side to target existing new holders – avoiding wherever possible the hedge and quant funds that have replaced momentum players as the IRO’s nightmare.

‘If your institutional holdings include too many of those, you can see some very erratic behavior, seemingly for no predictable reason, but it turns out you have just hit some metrics in a quant fund model and so it was an automatic sell,’ Tompkins points out. ‘We screen them to see if they are appropriate for our market cap and the specialty chemicals sector, to target the most appropriate ones. We prefer long-term institutional holders, value-based investors that appreciate our growth story – and the dividends.’

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