Owens & Minor (OMI)

24 Aug 2013 14:36

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Owens & Minor (OMI) isn’t exactly a household name that you easily recognize but more than likely you have seen the services they provide and didn’t even know it.

When you visit a hospital look around the room and OMI is all around. The examining table, cotton swabs, tongue depressors, pillows, stools, the tissue paper on the exam table, end even the stethoscope around the doctor’s neck, all supplied by OMI. OMI does not make these products but is the U.S. leading supplier for healthcare facilities.

From a dividend growth investor (DGI) perspective is also just as surprising. For the last 16 years they have been increasing their dividend payout at a wonderful pace and current yield of 2.7%.

Dividend Growth Rates
1-Yr 3-Yr 5-Yr 10-Yr
10% 12.8% 14.2% 15.6%

Looking at some basic numbers OMI meets most of my screening criteria for a DG stock:

Dividend Growth Rate Debt/Equity Ratio
Criteria OMI Criteria OMI
>= 7.2% 10% < 1 .22
Dividend Yield Payout Ratio
Criteria OMI Criteria OMI
> 3% 2.7% < 70% 57.5%

Though the dividend yield is slightly lower than my criteria the growth rate was more than enough to compensate. But dividend growth has been decreasing over the years so it is vital to dig deeper to determine future growth potential and sustainment.

Earnings from 2011 to 2012 actually decreased by 4.9% and was a reflection of the overall U.S. economy and availability of affordable healthcare for 2012:
2012 EPS 2011 EPS 2010 EPS
1.72 1.81 1.75

Looking deeper into the company, OMI has 55 distribution centers in the U.S. offering more than 220,000 products from more than 1400 suppliers and has access to more than 50% of U.S. Healthcare facilities. That is a far reaching network giving it a lot of leverage with OEM suppliers, especially young or small OEMs that cannot afford the overhead costs of large scale suppliers. But more mature and established suppliers have complained over the years of the limited market. Looking at some of the more major suppliers we see Covidien and Avid, both with recent declining earnings.

In response, OMI has expanded into Europe after they acquired Movianto from Celesio AG in 2012. The Movianto acquisition provided an additional 22 distribution centers in 11 countries and provides the additional large growth markets their suppliers were looking for and makes them even more attractive for enlisting additional suppliers.

OMI has been in the healthcare distribution and logistics supply chain for more 128 years and has honed the business model as sharp as the scalpels they sell. As OMI integrates Movianto they will incorporate what they have learned and greatly reduce Movianto’s overhead expenses while increasing effectiveness and providing organic growth. Once the improvements are incorporated they can then focus on expanding throughout Europe.

Europe is not the only significant investment OMI has recently made. Domestically the company has invested $50 million in technology over the last two years further improving their distribution, supply chain management, and consulting capabilities. The most notable is how strategic OMI's investments have been without impacting their long term debt during this time period:

2012 Long Term Debt 2011 Long Term Debt 2010 Long Term Debt
$217M $214.6M $210.9

These critical investments should begin to yield earning growth in 2013 and forward but much depends on how quickly their European operations expand.

Looking at dividend payouts OMI has been increasing payouts faster than earnings growth. In 2010 OMI’s payout ratio sat at 40% and three years later is sitting at 57%. In the short term this is not sustainable and needs to drop into the single digits (possibly as low as 4%). OMI is so conservative managing their financials I cannot foresee them doing otherwise.

Looking at the recent stock price of approximately $35 per share it carries a trailing P/E of 21.4 and a forward P/E of 17.5. The 5 year average P/E has been 16.74 so the current stock price looks to be overvalued to what the market has traditionally valued the company at.

With the potential decrease in dividend growth and current share price it just does not fit my investment goals. Though I do like their long term potential, I’d rather wait on the sidelines to see what happens with their European operations and dividend growth and would only consider if there was a significant drop in share price (less than $29 per share).

Note: I do not own this stock at time of this writing.

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