Baxter's A Buy For Growth, Cash Flow, And Rising Dividends

| About: Baxter International (BAX)
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Baxter International (NYSE:BAX) makes products that save and sustain the lives of people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. As a global, diversified healthcare company, Baxter applies a unique combination of expertise in medical devices, pharmaceuticals and biotechnology to create products that advance patient care worldwide.

Baxter International was founded in 1931 by Dr. Don Baxter to manufacture and distribute intravenous solutions. In 1935, Baxter added an R&D function that has been the source of innovative medical products and solutions for more than 75 years.

Baxter continued its commitment to innovation and enhanced its new product pipeline during 2011 with record-level investments in research and development of $946 million, representing seven percent of sales. In 2011, Baxter advanced more than 20 key R&D programs in late-stage clinical development which have the potential to profoundly improve the treatment and delivery of care for chronic diseases like hemophilia, immune deficiencies, Alzheimer's disease and end-stage renal disease. In addition, the company has accelerated the pace of business development with a number of business partnerships and acquisitions that complement Baxter's current businesses, broaden its global product portfolio and leverage key scientific, manufacturing and commercial capabilities.

In 2011, Baxter International reported healthy growth with revenues up eight percent to $13.9 billion. Net income increased 58% to $2.2 billion as EPS rose 62% to $3.88 as special charges in the prior year were not repeated. Earnings also expanded thanks to higher sales and improved gross margins as cost savings initiatives and restructurings provided benefits. Earnings per share additionally benefited from lower shares outstanding due to the company's substantial share repurchase program.

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In 2011, Baxter generated strong cash flow from operations which exceeded $2.8 billion (including a $150 million contribution to the company's U.S. pension plan during the year). Baxter returned approximately $2.3 billion of this cash to shareholders through dividends totaling $709 million and $1.58 billion in share repurchases of approximately 30 million shares at an average price of $52.67 per share. Over the last five years, the company has returned approximately $11.4 billion to shareholders in the form of dividends and share repurchases.

Baxter recently increased its dividend eight percent to $1.34 per share with the dividend currently yielding a solid 2.4%. Baxter should continue to generate strong cash flows in 2012 with operating cash flow projected to exceed $3.0 billion. With capital expenditures of approximately $1 billion targeted, free cash flow should top $2 billion, resulting in an attractive 6.2% free cash flow yield.

Looking forward to 2012, Baxter is well positioned with a strong pipeline of products in development, several new acquisitions and strategic alliances that should continue to provide innovative new products to support future growth. Management expects foreign currency headwinds to hold revenue growth to about two percent for 2012. However, earnings are expected to grow at a mid-teen rate with EPS in the range of $4.47 to $4.59. Baxter International is a high-quality company, generating healthy growth and strong cash flows, which they share with investors through steadily growing dividends and significant share repurchases. Buy.

Disclosure: I am long BAX. Hendershot Investments holds a long position in each stock presented. The content in this article should not be taken as investment advice or construed as a recommendation to buy or sell any security. Ideas expressed may not be suitable for every account, depending on an individual’s investment objective, risk-tolerance and financial situation. Information presented here was obtained from sources believed to be reliable but accuracy and completeness and opinions based on this information are not guaranteed. It should not be assumed that investments discussed will be profitable or will equal the performance of securities listed here or recommended in the past. All data, information and opinions expressed are subject to change without notice. Further information on companies mentioned is available upon request.