The newest addition to my income portfolio is a company that has been sitting on my watch list for a long time: Baxter International. BAX doesn't seem to be very popular among dividend investors, not sure why. It is my belief that Baxter is one of the better options in the medical device industry along the likes of JNJ, ABT, BDX, and MDT. Perhaps the fact that this company is only a dividend challenger without decades and decades of dividend growth keeps investors away?
I am always looking to increase healthcare exposure without delving into pure pharmaceutical stocks. I believe healthcare companies are poised to perform well the next few decades as the US population ages and average life expectancy increases. The longer people live, the more healthcare products they should consume. Baxter sells medical devices and treatments for medical conditions such as kidney disease, hemophilia, infectious disease, and burns & shock. It also produces vaccines and anaesthesia. In fact the small pox shot I received before deploying to Kuwait was produced by Baxter. It's right there in my medical record.
Personally I think this company has a lot going for it. At this purchase price it yields 2.89% with 7 straight years of dividend growth. 7 consecutive years is not particularly impressive, but I would note that BAX has been paying uninterrupted dividends since at least 1980 (that's as far back as it goes on the Baxter web page). Less than a week ago a 8.9% increase was announced. The payout ratio is under 50%, analysts expect solid future EPS growth around 9%, the buyback program is retiring shares, and the dividend is well covered by cashflow. BAX does a lot of business internationally with sales of 58% outside the US. I expect that percentage to increase over time. Debt is a tad high, but inline with peers such as BDX and ABT. It does have a large cash holding on its balance sheet to help quell debt concerns. Overall the numbers look very positive.
My calculated fair value for this company is $70.50, leading me to believe I was able to get in at or slightly under FV. Obviously I would prefer a little higher margin of safety, but right now that is hard to find. I'm done accumulating cash. I will be investing every single dollar hitting my account from dividends and deposits regardless of the heated stock market. I do not need more dry powder. Anyways my calculated FV was close to both morningstar and FAST Graphs. The p/e is currently a reasonable 16.6 with an attractive 12.7 forward p/e. While I do not think I over paid, only time will tell.
I had to make a quick decision here. Baxter stock took a noticable hit when one of its pipeline treatments failed to improve Alzheimer patients. I decided to pull to the trigger. If BAX can grow dividends at 7% per year, I will be a happy shareholder. That is all I need to see from a stock yielding about 3%.
Totally agree with you on accumulating enough dry powder. Mine has just continued to pile up and barring a major correction will probably continue to do so. I've been putting some of it to work through selling naked puts however to at least get some return. I reached a bit on my last 3 purchases without getting a great margin of safety but that's the reality of the market we're in.
ReplyDeleteYep. I have too much money sitting around doing nothing. I may have to look into selling puts, never tried it. It seems like a big commitment though, and I'm not convinced it is sound long term. I do not want to turn into a trader! However I think that as long as we are in a bull market (and we are) it would goose returns.
DeleteNice purchase. I have glanced at BAX from time to time, but haven't done much research on it -- maybe because medical device makers are already well-represented in my portfolio. I think you got it for a good price, especially considering the state of the broader market right now.
ReplyDeleteYeah there are a number of choices there. BDX, MDT, and ABT are currently uninvestable for me. You did a great job picking up these names before the massive runup the past year or two! Outstanding! I could kick myself for not buying MDT a while back, but the same could be said for most any other stock too.
DeleteI am mulling over lowering my minimum yield to 2.5%. Reality is what it is so maybe I need to adapt?
nice purchase. I think you will do well with this one. If I didn't already own MDT and BDX I'd probably be looking to add BAX. When I looked at the company last I did like it but thought the other two companies I mentioned were better priced at the time.
ReplyDeleteYes I missed out with MDT and BDX, hopefully one day the price will be right and I'll get another shot at owning a part of those fine companies.
DeleteNice buy at an attractive price. Following your article, I had a look into BAX - it's on my watch list now. The current yield compared with the 3 and 5 year average dividend yields is attractive so I'll be placing a limit order on Monday. Hope to join you as part owner.
ReplyDeleteI see the dip the other week evaporated. My calculations tell me it's no longer trading below fair value.
DeleteThis market is crazy. I don't even bother to spend much time looking at investments right now. I've been priced out!
I heard something the other day about baxter. The cpmpany appears to be a good value. I also know a older guy thats owned baxter for a long time.
ReplyDelete