Here is what the stock I am watching & researching that goes ex-dividend next week looks like:
- Yield of 5.45%
- Forward P/E of 8.8
- 18 years of Dividend Growth
The company that I am speaking of is Owens & Minor, Inc. (OMI). Now for the necessary company description:
Owens & Minor Inc is a healthcare logistics firm distributing low-tech, consumable medical supplies to acute-care hospitals. The company distributes products to healthcare service providers under various brands such as MediChoice and ArcRoyal.
O&M distributes low-tech, consumable medical supplies to acute-care hospitals and other providers. The company distributes thousands of products produced by more than 1,200 suppliers to about 4,000 healthcare providers.
--Taken from www.gurufocus.com
As you can see from my valuation I believe that OMI is a potential breadwinner for your portfolio. The company recently had a rough quarter and has lost a significant amount of value in the past month. This I believe could be a great opportunity to buy.
First off let's go ahead and start at the dividend. At 5.46% this dividend offers tremendous value, and with a 58% payout ratio I believe that it is relatively safe. The company has been committed to shareholder returns in the past, with 18 years of consecutive dividend growth. Add to that the fact that the company has been consistently buying back shares and you get the picture of a company that loves their shareholders.
A recent acquisition. The company recently acquired part of Halyard health, the surgical and infection prevention business. The estimates currently are for the deal to add over a billion dollars in revenue each year to OMI. That sounds great to me! This is part of the reason why OMI has such a low Forward P/E.
The revenue growth has been declining pretty steadily over the past year. This obviously is a red flag that must be raised and investigated before purchasing any company. The recent 3Q miss of about 10 cents per share is ugly and explains the recent drop in the stock. Why has the revenue been dropping though?
Well first off OMI lost a major customer. This took a large hit in the revenue department, one that OMI couldn't recover from during the quarter (or probably year for that matter). Also OMI noted that there really hasn't been much growth with existing companies either. This isn't what you want to hear...
The addition of a large amount of debt. The acquisition of Halyard Health cost OMI a little over $700 million in cash and debt. For a company that was only holding around $160 million in free cash flow and has an operating cash flow of about the same amount this could get interesting. In December of 2016 debt was sitting at just above $500 million and now has risen to $900 million and some change.
A doubling of debt is always an interesting thing to try to do the math on. Will the acquisition be able to pay off? It seems that the company is banking that it will. This is a huge risk for not only the company but the investor as well. Acquisitions always seem well and good until the promises that the company set forth fail and the estimates of future revenue do not pan out.
The opportunity of a 100% return is a great reward but the risks are definitely there. Whenever a company that has been unable to increase organic revenue in the short-term acquires a potential revenue stream by taking on debt it makes you wonder if it is a reach that could end in disaster.
For me though, I believe that I will soon be taking a small position in OMI. The risk/reward seems like a pretty fair payoff with a yield over 5% and a dividend that hopefully can continue to rise. If the acquisition begins to show the returns in 2018 then I believe the stock will rise and I will be in line to make a pretty penny. If not? Then I will collect $1.03 per share for the year's holding and the loss shouldn't be too significant. This one is a pretty easy one for me to see.
As always let me know what you think below!