We are in the midst of our DIY Dividend Investors Club series which is dedicated to the open discussion and analysis of building and managing a long-term dividend portfolio. The goal of the series is to build a dividend portfolio "watch list" by sector (based on the 9 major sectors in the S&P 500 as well as alternative sectors like MLPs, REITs and BDCs).
Baxter Business Overview (source: S&P Capital IQ)
Baxter International Inc. develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney diseases, trauma, and other chronic and acute medical conditions. It sells its products through its direct sales force, independent distributors, drug wholesalers, and specialty pharmacy or other alternate site providers to hospitals, kidney dialysis and rehabilitation centers, nursing homes, doctors' offices, clinical and medical research laboratories, and patients. It operates in the United States, Europe, the Middle East, Africa, the Asia-Pacific, Latin America, and Canada. The company was founded in 1931 and is based in Deerfield, Illinois.
The core of our investment philosophy is to buy great stocks at reasonable prices and we use a combination of fundamental and technical analysis to determine which stocks to buy and when to buy them.
We created our ranking system, which ranks over 750 U.S. dividend stocks on a monthly basis, to help us find the best dividend stocks. In our experience, if you rank all of the stocks in a universe against their peers on a consistent basis, it becomes clear which companies are the strongest and which offer the best investment opportunities going forward. Our composite rating is derived by ranking each stock based on 28 key fundamental and technical data points in five sub-rating categories.
The table below for Baxter highlights some of the key data points that we look at when determining our rating.
As highlighted in the table above, Baxter has a solid overall Parsimony Rating of 80, primarily driven by its high Dividend Track Record Rating (87).
Baxter has a relatively low beta (0.73) and the stock has exhibited low volatility in the past. The company has a decent dividend yield of 2.9% and it has delivered shareholders a 58% total return over the past 5 years.
Baxter has a strong track record of returning significant value to shareholders in the form of dividends and share repurchases. BAX has increased its dividend at a compound annual rate of 12.9% over the past 10 years and has returned over $12 billion cumulatively to shareholders through dividends and share repurchases. As shown in the chart below, BAX has raised its quarterly dividend 6 times in the past 20 quarters.
Valuation is a key factor in determining our "Buy Zones."
We use our rating system to determine WHICH stocks to buy and we use our "Buy Zone" reports to determine WHEN to buy them. We focus on four key levels of support when determining a "Buy Zone":
- Valuation - Support levels based on historical valuation multiples.
- Technical - Support from short and long-term trend lines (i.e., 10-week and 40-week moving average).
- Volatility - Target correction levels based on historical volatility and maximum draw down.
- Yield - Support levels based on forward dividend yield.
Below is a summary valuation analysis for Baxter:
As highlighted above, BAX is currently trading at 20.10x trailing earnings, which represents 25.0% and 20.5% premiums to the company's respective 3-year and 5-year historical averages.
Is Baxter In The "Buy Zone"?
Baxter is hovering around its 52-week high and it currently trades 8.5% above the top range of its Buy Zone. Ideally, we would like to purchase BAX under $68.00 (which would equate to a forward P/E ratio under 14.0x and a forward yield above 3.0%).
Baxter is a great dividend stock with strong fundamentals and a stable track record. While we don't recommend buying at this level (due to valuation), we will consider buying the stock on any meaningful pullback.
Disclosure: The author is long BAX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.