Here’s a stock you might think would get a little attention.
An 18-year Dividend Achiever with a 3.1% current yield, an additional 12% dividend boost in the pipeline for 2010, average five-year earnings and dividend growth over 20% and 30% respectively, and a stock price that has surged nearly 200% over those five years. And it features an ROE of 24% and no long-term debt.
In the case of healthcare diagnostics smallcap Meridian Bioscience (VIVO), your thinking would be exactly right. The stock gets a little attention.
Very little.
For example, you’ll find only about 20 articles from Seeking Alpha contributors that reference VIVO, spanning roughly the past two years.
Contrast that with healthcare Dividend Aristocrat Becton Dickinson (BDX) and Dividend Achiever Cardinal Health (CAH). Seeking Alpha lists over 100 articles referencing BDX and nearly 70 referencing CAH, yet VIVO routinely offers a better dividend yield and better sales and earnings growth.
What keeps this stock in the shadows? I’ll point out several things, including one or two that make sense to me.
First, VIVO is jumpy. If your favorite amusement park ride is the merry-go-round at noon, not the roller coaster after dark, you’re probably standing in the wrong line here.
With a market cap under $900 million and double-digit surprises driving big moves on earnings reports, too much VIVO could keep coffee awake at night.
In April, for example, VIVO missed estimates by 14% and the stock took an 11% one-day dive. About a week later it popped back up 12% in a single day. In July the company beat estimates by 10% and the stock dropped 5%.
Whew! Lucky thing VIVO only beat estimates by 5% in November. That’s stable for them.
Second, if you’re thinking there’s a high multiple attached to all this growth and gyration, you’re exactly right again. VIVO clocks a trailing P/E of 27 right now, which is about the middle of its 10-year range. Other VIVO ratios are high, too. I guess they keep the P/E from getting lonesome way up there.
Next, for investors who prefer stocks that only go up, ouch. Despite VIVO’s stellar 5-year returns, it stumbled recently. Its total return flopped about negative 4% over the trailing year, when its business slowed from torrid to merely good, with key growth measures increasing by only single digit percentages.
My verdict on VIVO so far? Being cautious about high valuations makes sense to me, especially when multiples are high but growth seems to be slowing. Volatility and recent performance worry me less, though I understand why investors don’t like them. Smooth, upward arcs are so much better.
Anyway, if you’re not rattled yet, here’s the big one: VIVO’s payout ratio on earnings is about 80%.
But that one doesn’t bother me one bit. Because VIVO’s payout ratio isn’t the result of an earnings shortfall and a desperate management clinging to an unsustainable dividend policy.
Nope. It’s the result of a dividend policy that’s been proven over the past seven years. In late 2002, VIVO adopted a payout guideline stating 75% to 85% of each year’s expected earnings would go to dividends. That worried me a little then. But not now.
Since that announcement, VIVO’s annual growth in revenues has averaged 14%, net earnings 27%, free cash flow 21%, and dividends 50%, including a couple of atypically large increases to boost the payout ratio after the policy was enacted.
And with all that cash going to shareholders, VIVO still invests in its business to stay healthy and growing.
Here’s management in April 2009, leaning into the winds of the most frightening economic and financial storm most of us have ever known.
“We are maintaining our focus on new product development and we have increased our investments to support the near-term introduction of new products . . . We have built a solid and efficient business based upon new product innovation and operating excellence.”
Management went on to confirm three new products for 2009, while VIVO paid a dividend 21% higher than the previous year.
And by November, VIVO was sitting in sunshine again, looking forward to “double-digit growth in sales and earnings and new records” in 2010, which they added, “promises to be a very good year.” Analysts surveyed by Yahoo Finance agree, currently estimating 16% EPS growth for FY 2010, and 17% for FY 2011.
Granted, it’s easy to find investors who balk at paying multiples in the twenties for growth in the teens, and nobody’s estimates include the unknown impact of healthcare reform on a company like VIVO.
One reform scenario, much lower re-imbursement rates, would dim VIVO profits. Another, increased demand for millions of additional quick and affordable medical tests and screenings, would brighten them.
My bottom line VIVO verdict? The combination of current yield, dividend policy and business growth is rare enough to merit far more attention than the stock gets, if only for the yield-on-cost possibilities. And what might happen with healthcare reform may be less a risk to VIVO investors than whether today’s stock price is concocted from yesterday’s growth.
Patient investors with strong stomachs and diversified portfolios might watch for VIVO’s next earnings report, which should be released in the next couple of weeks. If VIVO’s growth disappoints the market, or a rocky earnings season rocks everything, there may be an entry point for investors whose own homework points them to VIVO.
Finally, if you prefer a little more yield, a little less jumpiness and probably some cyclical growth to boot, consider taking a head-first dive into the trash business. Check out my Seeking Alpha article “Waste Management: Solid Business with a Rising Dividend” (WM).
References and Links
Press Release, “Meridian Bioscience Reports Record Fiscal 2009 Operating Results, Increases Regular Cash Dividend Rate, and Reaffirms Guidance,” November 12, 2009.
Morningstar Key Ratios “Meridian Bioscience 10-Year Growth Rates” January 2010.
Press Release “Meridian Bioscience Reports Record Second Quarter and Six Months Operating Results,” April 16, 2009.
Yahoo Finance, “Meridian Bioscience, Analysts Estimates,” January 2010.
Disclosure: Long VIVO, WM
