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By Mark Bern, CPA CFA

Baxter International (BAX) is a global diversified medical products company with offerings in pharmaceuticals, biotech and medical devices. The company derives 58% of its revenue from outside the U.S. This geographic and product diversity may help to limit the exposure Baxter will have to healthcare reform, an important factor in assessing healthcare companies these days.

Earnings per share have grown by an average of 19% per year over the past five years and dividends have increase annually at an average rate of 13% over the same period. The company has a pipeline of new products with good potential to sustain continued growth. The recent acquisition of Synovis Life Technologies adds products that complement existing Baxter products in the same space. It does not appear that the $325 million price was excessive as management expects only slight dilution in 2012 and earnings accretion to begin no later than 2014. Synovis products are already in the marketplace and sales should increase over time supported by Baxter’s more extensive sales, marketing and distribution network. Acquisitions made earlier in the year (Prism Pharmaceuticals and Baxa Corporation) will also add breadth to Baxter’s nutritional therapies and drug delivery systems. Additionally, Baxter has some promising treatments expected to emerge from trials in 2012 for approval in the U.S. market.

Baxter bought back 26 million shares through the first three quarters and I expect it to continue the share buyback program. Fewer shares translate into higher share earnings growth rates and a higher rate of appreciation. It also makes increases to dividends per share with fewer shares outstanding.

The dividend yield is currently 2.7% and has been increased in each of the last six years. I expect annual increases to continue at about 8% - 10% over the next five years and for earnings to continue rising at a similar rate. The company has an excellent balance sheet with debt less than 40% of total capital and interest payments well covered. The company had over $2 billion in cash at the end of the third quarter and continues to manage the cash position to the continuing advantage of shareholders, through buybacks, acquisitions, dividends and R&D.

The current stock price was $50.18 (at the market close January 10, 2012). I expect the price to reach $80 over the next five years; including the rising dividends should provide average annual total returns of about 12%. This may not seem very exciting, but I really like the consistency. This is one investment that deserves to be part of a core portfolio. It's similar to Johnson and Johnson (JNJ) in terms of risk. I even think it is less risky in terms of patent issues and healthcare reform than either Merck (MRK) or Pfizer (PFE). Conservative investors seeking a rising dividend should consider Baxter at current levels.

Source: In Search Of Rising Dividends: Baxter International