Female Health Company (NASDAQ:FHCO) is usually considered among socially responsible investors, being broadly defined as an investment strategy that seeks to consider both financial return and social good. Even though the social impact of the company's business has a lot of merit, income investors also can also benefit from this opportunity. Female Health Company currently has an attractive 3.2% dividend yield, which for a small-cap company is unusual. The Female Health Company is publicly traded on the NASDAQ stock exchange and has a market capitalization of around $250 million.
The company manufactures, markets, and sells the FC2 female condom in the United States and internationally. Its primary product is the FC2 female condom, the only currently available product under a woman's control that is approved by the U.S. Food and Drug Administration [FDA], which provides dual protection against unintended pregnancy and sexually transmitted infections, including HIV/AIDS. The company's primary mission is to help women to stay healthy.
The FC2 female condom does not compete with the male condom, but is an alternative to either unprotected sex or to male condom usage. It has several unique advantages over other forms of contraception, such as its low cost, it places the decision in the woman's hands, and can be inserted hours ahead of sexual activity. These advantages are especially important in more traditional cultures, like in Africa. Indeed, South Africa has 0.7% of the world's population but 17% of all HIV/AIDS cases, making female condoms a very valuable product there to protect against sexually transmitted infections.
Female Health Company is not a business-to-consumer company, instead it sells its products mainly to a small number of customers who purchase large quantities. Those customers are governments, public health clinics, and not-for-profit organizations. Its two biggest customers are the United Nations Population Fund and the John Snow Agency, accounting for about 50% of the company's sales. No other customer accounts for more than 10% of sales, including ministries of health, local governments, and nongovernmental organizations. Generally speaking, those customers have made HIV/AIDS prevention one of their top priorities, and are therefore committed to spending hundreds of millions of dollars every year to fund prevention programs. This will allow Female Health Company to have a growing revenue stream for the foreseeable future.
In its fiscal year [FY] 2012, which ends in September, the company's unit sales increased almost 90% and revenues jumped by 89% to $35 million, due to increased visibility and availability for the FC2 female condom and a higher international profile. The company expects this positive trend to continue, and has expanded to 138 countries and is boosting its annual production capacity to around 100 million units. In FY 2012, it delivered slightly above 60 million units to customers, a new annual record. Moreover, the company enjoys very high business margins, reflected on its impressive 63% return on equity and 44% profit margin.
This strong financial performance permits the company to rapidly expand production capacity, invest in cost reduction and new product development, but also for an attractive shareholder remuneration. In FY 2012, dividends paid to shareholders totaled approximately $6.2 million, which are more than funded by the $10.4 million produced in cash flow from operations. Female Health Company pays a quarterly dividend, which was raised to $0.07 per share a few months ago. Its annual dividend is therefore $0.28 per share based on current quarterly distributions, which works out to roughly 3.2% yield based on the current stock price. The dividend payout ratio is around 50%, a low level for a highly profitable company. Furthermore, the company's balance sheet is strong with virtually no long-term debt, making its dividend safe over the long term.
On the other hand, the company's main weak point is its dependence on governments and nonprofit agencies, which may have budgetary constraints. This may affect the company's revenues or mean it suffers order delays, making its quarter-to-quarter sales and profits volatile. Nevertheless, these are usually short-term issues that don't affect the company's long-term growth path.
Female Health Company's FC2 female condom helps people around the world to protect against sexually transmitted infections, doing well for the society. Moreover, its business is also very profitable and pays a safe and attractive dividend yield of 3%, being therefore also good for the shareholders. This is a company that may be followed mainly by socially responsible investors, but income-investors can also benefit by receiving a good income stream from a business that is uncorrelated from the majority of dividend-paying stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.