Follow the dividend investment decisions of a person who has no background in financial investment and wishes to take control of their financial future.

Steris Corporation (STE) - 30 Oct 2013 00:25

Tags: healthcare ste steris stock_review_2013

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One of the more difficult challenges with Dividend Growth Investing (DGI) is finding the next Dividend Aristocrat (stocks growing dividends 25 or more years in a row) before they become an Aristocrat.

The reward for finding a future dividend grower early are large consecutive growth periods (greater than 10%) over a long period of time. The only down side is a low starting yield but the growth rate over a long period of time compensates (exceedingly).

In my attempt to find a future aristocrat I decided to search in the low end of mid-cap stocks (stocks with a market cap of $2B to $3B) often an area overlooked when it comes to DGI. In my search I came across Steris Corporation.

Steris Corporation (STE) specializes in the manufacture a sale of sterilization equipment, supplies and lab services. They primarily serve the healthcare industry but they also provide decontamination equipment to the defense industry.

STE has been growing its dividend payout since 2005. My normal criterion is at least 10 years of dividend history but with 8 years of growth we need to run the numbers to see if it has what it takes for the long haul.

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Dividend Growth Rates
1-Yr 3-Yr 5-Yr 10-Yr
12.5% 20.6% 26.8% n/a

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Looking at some of my screening criteria for a DG stock we see some solid numbers:

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Dividend Growth Rate Debt/Equity Ratio
Criteria STE Criteria STE
>= 7.2% 12.5% < 1 0.53
Dividend Yield Payout Ratio
Criteria STE Criteria STE
> 3% 1.8% < 70% 30.66%

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The only weakness on the initial screen is that the current dividend rate of 1.8% is significantly below the 3% criteria. Depending on your time horizon this may be an obstacle but if your timeline is 15 to 20 years and you could be looking at a 14% dividend on cost.

Looking at earnings over the last 6 years we have positive earnings growth since 2008 with the exception of 2011. In 2011 there was a $110M liability related to its product SYSTEM 1 rebate program.

2013 EPS 2012 EPS 2011 EPS 2010 EPS 2009 EPS 2008 EPS
2.72 2.31 .85 2.16 1.86 1.2

The balance sheet is fairly strong as reflected with a debt/equity ratio of .529 and a current ratio of 3.19. The only area of risk was the jump in long term debt from $210M in 2012 to $492M in 2013 but further investigation identified that the additional debt was incurred to close on 4 acquisitions.

Digging into the company’s assets is where you will find the real hidden treasure in this company. In 2012 patents were valued at $43.2M but in 2013 patent value jumped to $169.5M. The large increase was a combination of aggressive R&D spending (12% of operating costs) and key acquisitions over the last few years.

Research & Development Spending
2013 2012 2011
$41.3M $36M $34.3M

As of the 2013 annual report, the company held 328 United States patents and 823 foreign patents and had 82 United States patent applications and 282 foreign patent applications pending. STE has been quietly becoming an Intellectual Property juggernaut allowing it to compete with companies 5 times its size.

Looking at the recent stock price of approximately $46 per share it is currently trading at its 52 week high and carries a trailing P/E of 17.3 and a forward P/E of 16.68. The 5 year average P/E has been 19.86 so the current stock price looks to be appropriately undervalued to what the market has historically valued. On the growth front, anticipate significant increases from lab services and sterilization supplies in mature markets such as the U.S. and Europe while sterilization equipment should experience growth in developing healthcare markets.

In summary, the company has tremendous strengths in their intellectual capital and strong balance sheet. For weaknesses there is lack of communication from the CEO to a vision or strategy on capturing growth in Latin America and Asia. In regards to risk there is the danger of the company not translating its intellectual property into future revenue growth. I would consider this a worthy investment in lieu of the risks and if they continue their aggressive R&D investments and key acquisitions we could be seeing a dividend aristocrat in the making. Even though the stock price is trading at its 52 week high I see a great long term value in both equity & dividend growth and would be a buyer at current price levels.

Note: I do not own this stock at time of this writing. - Comments: 0


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