Should investors consider this expansion in healthcare business after its massive dividend hike?
WWhen a company initiates a huge dividend increase, its investors usually receive the news with enthusiasm. But it’s still important to take a deeper look, especially with a big increase in payouts.
Recently, The Vascular Master (NASDAQ: LMAT) announced that it is increasing its quarterly dividend from $ 0.095 per share to $ 0.11. This marks an increase of 15.8% at a yield of 0.7%, still significantly less than the S&P 500‘s on average about 1.3%.
While this may indicate that management and the board have confidence in its business prospects, such an increase in payouts could also have overstated the company’s dividend obligation. Does LeMaitre’s dividend remain sustainable going forward – and is it a good buy for long-term appreciation and / or income?
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Earnings easily cover payment
A good starting point for assessing the security of LeMaitre’s dividend is to measure its earnings per share (EPS) against the dividend obligation. Because LeMaitre only uses GAAP (Generally accepted accounting principles) EPS in its reporting, we will stick to it Diluted BPA (which is a way of accounting for all the shares that a company may be required to issue in the future). This figure reached $ 1.04 for the whole of 2020 against $ 0.38 per share of dividends paid, for a diluted payout per share ratio of 36.5%.
For context, this compares favorably to LeMaitre’s much larger pair of medical devices, Medtronic, where the payout ratio was 50.1% in fiscal 2021. When we consider that the size and scale of LeMaitre as a company are not yet factors limiting the capacity of the company to reinvest in future growth, it makes sense that LeMaitre opts to retain more of its capital compared to Medtronic.
LeMaitre’s market cap of around $ 1 billion is less than 1 / 140th the size of Medtronic’s $ 172 billion, making it easier for the former to reinvest for future growth. LeMaitre is a less established company looking to gain market share, while Medtronic’s ability to reinvest in its business is limited by the law of diminishing returns. The latter believes that it serves its shareholders better by give them more money, while the former believes he can create much more shareholder value by growing the business rather than focusing on returning money to shareholders.
Since LeMaitre only provides forecasts a quarter in advance, we will use Yahoo Finance analysts’ average estimate of $ 1.26 for diluted EPS for 2021 versus LeMaitre’s annual dividends per share of 0. , $ 44, indicating a slight decrease in the payout ratio, to 34.9%.
Generate significant cash flow
LeMaitre also appears well positioned from a cash flow perspective to pay his dividend obligation.
The company sells medical devices intended primarily to treat peripheral vascular disease (LeMaitre Valvulotome) – and to a lesser extent, end-stage kidney disease (Artegraft Collagen Vascular Graft) and cardiovascular disease (RestoreFlow Cardiac Allografts) – to hospitals for to vascular surgeons. This activity represented 80% of sales in 2020. LeMaitre converted $ 117.2 million in sales into $ 34.8 million in operating cash flow compared to $ 3.0 million in investments in 2020 , for free cash flow (FCF) of $ 31.8 million. Considering the $ 7.7 million in dividends paid during this period, this equates to an FCF payout ratio of just 24.2%.
Without the company’s forecast for operating cash flow or capital expenditure in its press release on first quarter 2021 results, it is difficult to estimate LeMaitre’s FCF for the current 2021 fiscal year. , ending December 31. But based on its increase in FCF from $ 0.3 million in Q1 2020 ($ 1.2 million in operating cash flow minus $ 0.9 million in capital expenses) to $ 5 million. dollars in the first quarter of 2021 ($ 6.1 million in operating cash flow minus $ 1.1 million in investments), it looks like the company is able to meet or even exceed this level of FCF in 2021.
Even though LeMaitre’s FCF is stable against a moderately higher dividend obligation environment in 2021, its FCF payout ratio looks set to stay in the mid to upper range of 20% for the year. Measured by both diluted EPS and FCF, LeMaitre’s dividend appears to be secure for 2020 and 2021.
A rock solid balance sheet
However, simply maintaining stable and viable payout ratios is not always a sign that a dividend will remain secure in the future. This is why we will also examine LeMaître’s record.
We’ll start by looking at the Interest Coverage Ratio, which measures the number of times a business can pay its interest expense from profit before income taxes (EBIT). This is a particularly useful metric because it shows how far a company’s EBIT can drop before it is unable to cover its interest costs.
Fortunately, LeMaitre said an interest coverage ratio of around 15 in 2020 ($ 8.9 million EBIT / $ 0.6 million interest expense). This figure is significantly higher than that of its closest counterpart, Medtronic, which had an interest coverage ratio of around 4 in its previous fiscal year.
In addition, LeMaitre maintained $ 23.5 million in cash and cash equivalents in the first quarter of 2021, which would be sufficient to repay almost all of the $ 31.2 million in long-term net debt of the business ($ 28.5 million in long-term debt and $ 2.8 million that is due within one year). A net debt burden of $ 7.7 million is very manageable for LeMaitre, given that the company generated $ 27.4 million in EBIT in 2020.
Is this a purchase?
LeMaitre’s positive trajectory – including its very sustainable dividend payout ratios, high interest coverage ratio, and miniscule net debt – leads me to believe that the company can afford its recent dividend hike to two. figures. Investors looking for dividend security and above-average growth should consider looking to LeMaitre below $ 60 a share.
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Kody Kester is a long acting Medtronic. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.