Wednesday, May 8, 2013
New Purchase - BAX
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%.