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This article continues my series on consistent dividend growth stocks with a low stock turnover ratio. This screening idea comes from research by Robert Ibbotson, a Yale finance professor. He found that illiquid stocks tended to outperform more liquid stocks. He offered three explanations for this:

  1. Investors prefer liquid stocks to illiquid stocks; therefore they pay a premium for liquidity, making those stocks overpriced.
  2. As the supply of capital grows, all stocks become more liquid, but the least liquid stocks receive the greatest relative benefit.
  3. More popular stocks attract more interest and attention, which results in less chance to score outsized future price gains.

Illiquidity was defined in relative terms as the average trading volume for a stock divided by its outstanding shares. Therefore it does not just mean small-cap stocks with low floats. I modified this definition by multiplying by 365 to create an annual turnover percentage, which I felt would be easier to understand and compare.

Screening Process

I started with the CCC list of stocks (about 500) and added columns containing the average daily volume and shares outstanding. The annual turnover percentage was calculated as:

Turnover % = (Avg_Vol / Shares_Outstanding) * 365

I proceeded to sort the list from lowest to highest, and then took approximately the top half by setting a cutoff value of 200%. I'm most curious about the stocks with lower percentages, but didn't want to be too exclusive. I then screened out stocks with payout ratios above 60%. Next, I focused on stocks from the Healthcare sector that had double-digit projected earnings and/or dividend growth rates (DGRs) over the 1-yr to 5-yr time periods. This process yielded the following stocks, in order based on Annual Turnover.

Most of the stocks from this screen had less than 100% turnover, but I eliminated those with current yields below 1.5%. I can provide those tickers if readers are interested. Three of these are foreign ADRs, however two are U.K. firms, so there should be no foreign withholding taxes. Novo Nordisk (NVO) is a Danish firm and the tax rate is 28%, though investors should be able to get much of it back using the foreign tax credit, assuming a regular account.

Name
(Yrs of consistent div growth)

Ticker

Annual Turnover

Yield*

Beta*

Payout Ratio

1-YR Est Earnings Growth

1-YR DGR

3-YR DGR

Novo Nordisk A/S (11)

NVO

19%

1.7%

0.56

46%

16.1%

29.2%

27.2%

Smith & Nephew plc (7)

(SNN)

21%

1.8%

0.55

26%

10.4%

9.9%

10.0%

AstraZeneca plc (9)

(AZN)

41%

6.3%

0.58

38%

3.8%

12.0%

12.4%

Span-America Medical Systems (13)

(SPAN)

41%

2.6%

0.73

31%

n/a

7.5%

7.1%

National Healthcare Corp (8)

(NHC)

78%

2.6%

0.56

30%

7.7%

7.4%

8.8%

Stryker Corp (19)

(SYK)

200%

1.5%

0.87

25%

8.3%

20.0%

29.7%

Data with * from Google Finance as of April 8, 2012. Other data from April CCC list.

The Stocks

  • Novo Nordisk is a pharmaceutical company in Denmark that operates in two segments, diabetes care and biopharmaceuticals. Its products cover insulins, obesity, hemophilia, growth hormone therapy, and other areas. Of the group, this stock had the lowest turnover rate, almost the lowest beta, and the highest earnings and dividend growth rates. Over the last decade the stock is up over 600%, and NVO is up 50% in the last six months. At a current PE of 27.5, NVO seems a bit pricey, but relative to other major drug firms, it delivered superior returns over longer periods (3-, 5- and 10-yr). Note: NVO only pays a dividend in March.
  • Smith & Nephew develops, manufactures, and sell medical devices in orthopedics, endoscopy, and advanced would management sectors worldwide. Compared to the group, it was very low in turnover, beta, and payout ratio, and consistently raised dividends around 10% annually. Given the low payout ratio, the dividend is safe and can easily be raised. SNN also has low debt levels. While SNN has generally outperformed the S&P 500 (SPY), it has underperformed for the last 3 years. Note: SNN pays semi-annual dividends in April and October.
  • AstraZeneca is a global biopharmaceutical company that discovers, develops and commercializes prescription medicines for six areas of healthcare: Cardiovascular, Gastrointestinal, Infection, Neuroscience, Oncology, and Respiratory and Inflammation. Of the group, it had the highest dividend yield and has raised its dividend around 12% annually in recent years, making it a good choice for those focused on current income. Future earnings growth projections are low, but with a 38% payout ratio, the dividend appears safe and there is still room for increases even if earnings are flat; a recent WSJ article expressed concerns about AZN's outlook and some thoughts on how it could grow. Note: AZN pays semi-annual dividends in February and August.
  • Span-America Medical Systems manufactures and distributes therapeutic support products for medical, consumer, and industrial markets. The growing elderly population could be viewed as a plus for SPAN, though annual earnings and operating cash flows have declined over the last three years. SPAN offers a higher current yield than SNN and SYK, but with lower dividend growth rates. With a 31% payout ratio, the dividend is safe and has room for growth even if earnings stay flat. SPAN has very little debt and insiders own 27.5% of the company.
  • National Healthcare Corp operates and manages long-term health care, retirement, and associated assisted living centers, and provides home health care and hospice services in the United States. This makes it unique compared to the drug and medical device makers in the group. It basically offers the same yield, dividend growth, and payout ratio as SPAN, but with lower beta. Net income and operating margins increased each of the last three years, and the firm has low debt and a low number of outstanding shares. With the growing elderly population, this could be an interesting play.
  • Stryker Corp is a medical technology company that operates in three major segments: Reconstructive, MedSurg, and Neurotechnology and Spine. Its products include hip and knee replacements, surgical and emergency medical equipment, communications systems, and spinal implant systems. With the exception of 2009, SYK has increased revenues and net income in each of the last four years. It has been raising dividends around 20% annually for the last 3 years, and with its low payout ratio and yield, SYK can continue the large increases. SYK has lagged the SPY in recent years as its PE ratio (and other metrics) compressed from the 40s to around 16 today, making it more reasonably valued.

Low-Yield, Low-Payout

With the exception of AZN, these CCC stocks have a medium or low yield, based on the cutoffs that I established in my previous payout-yield article, and most fall into the low payout category (<33%). Each firm has a record of consistently raising dividends, with all but SPAN and NHC delivering 9.9% or higher DGR over the 1-YR and 3-YR periods. The low payout ratios suggest safe dividends and continued room for growth.

Historically low-yield, low-payout stocks tend to perform very well over the long run. However, this group has not fared so well versus the SPY over the last decade. NVO was the best and most consistent performer, while the rest generally tracked the SPY (+/-20 percentage points) and had ups and downs. For the 6- to 10-year periods, SPAN and NHC pulled away from the pack. AZN's price has been generally flat, but with a 6% yield, that still beats a CD.

Thoughts

With the pending decision on the health care law and continued efforts to control rising health care costs, there are certainly some uncertainties for this sector. However, demographics appear to be in its favor, which may offset any pricing concerns, and the need for health care should continue to grow. I currently own Stryker, which I picked up on a dip to $45 last year. I'm curious to learn more about SPAN, as it has a higher yield and lower PE ratio. I need to find out more about its earnings growth projections, which were not available. For the previous 5 years, its EPS growth was half the rate of SYK though.

For yield, AZN looks promising at 6.3% and with room for dividend growth. I would want to check more into the concerns about drugs coming off of patent and would not expect strong price growth. On that topic, NVO is very interesting, but it just seems overpriced to me; perhaps someone else knows more about it and can share some insights.

Other Low-Turnover Quick Pick Articles:

Consumer Discretionary stocks (chosen using the illiquidity screening process).

Consumer Staples stocks (chosen using the illiquidity screening process).

Disclaimer: This screen is meant to identify some CCC healthcare stocks with low liquidity and strong dividend growth based on historical information, as a starting point for potential investment. Readers should do their own due diligence before investing in any of these stocks.

Source: 6 High-Dividend-Growth Healthcare Stocks With Low Turnover, Beta, And Payout Ratios