Baxter International Inc. (BAX) develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney diseases, trauma, and other chronic and acute medical conditions. This dividend paying company has paid dividends since 1934 and has managed to increase them for 8 years in a row. Up to 1998, the company was a dividend aristocrat that had increased dividends for 42 years in a row. However, after a few spin-offs, the dividend was frozen until 2006.
The company’s latest dividend increase was announced in May 2014 when the Board of Directors approved a 6% increase in the quarterly dividend to 52 cents /share. The company’s peer group includes Medtronic (MDT), Becton Dickinson (BDX) and C.R. Bard (BCR).
Over the past decade this dividend growth stock has delivered an annualized total return of 11.30% to its shareholders.
The company has managed to deliver a 9.20% average increase in annual EPS over the past decade. Baxter International is expected to earn $5.13 per share in 2014 and $5.44 per share in 2015. In comparison, the company earned $3.66/share in 2013.
The annual dividend payment has increased by 12.40% per year over the past decade, which is higher than the growth in EPS. This was mostly possible due to the expansion in the dividend payout ratio over the past decade. Going forward, I expect dividends to grow by less than 9%/year.
A 12% growth in distributions translates into the dividend payment doubling every six years on average. If we check the dividend history, going as far back as 1983, we could see that Baxter International has actually managed to double dividends every eight years on average.
Over the past decade, the dividend payout ratio decreased from 93% in 2004 to 27% in 2006. Since then, it has been increasing gradually to 52.50% by 2013. Based on forward earnings however, the dividend payout will decrease to 40%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
The return on equity has increased from 10.80% in 2004 to 26.10% in 2013. The values in 2004 were unusually depressed due to one-time accounting charges. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Currently, the stock is attractively valued, as it trades at a forward P/E of 14.50 and yields 2.80%. Given the scarcity of quality dividend payers available at attractive values today, I am considering initiating a position in the company, subject to availability of funds.
Full Disclosure: Long MDT and BDX
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