What do they do? They are, according to Google Finance:
'a global medical devices business operating in the markets for orthopaedic reconstruction and trauma, endoscopy (which includes arthroscopic procedures referred to as sports medicine) and advanced wound management'Bread and butter if ever such a thing existed - there's no way any of those problems are going to disappear in a hurry, and with an aging population there will be more people needing hip replacement - combine that with increasing wealth in the developing world and this must be a long term winner.
Is it a contrarian play? Not particularly. Over the last decade the share price has moved upward, although it has been up and down. The shares are trading roughly in line with where the price was in 2007/8 where the company was no doubt seen as a defensive play.
It throws a lower than average dividend (1.98%), but the average dividend growth from last, this, and next year's predicted is 24% - with a big jump next year. That's pretty punchy stuff. Can the company afford it? Dividend cover averaged between this and next financial year is 3.77; unless things go badly wrong (and this company is a leader at what it does), there should be no problems at all.
I noted earlier - lots of people are getting old, and lots of increasinly wealthy countries will be demanding access to the kind of product Smith & Nephew are pushing. The company does not do too badly - it's got offices in 36 countries worldwide, so thats about 20% of countries covered off globally. Laura's pretty happy with it as well.
Now, this month I have tried to become a bit more systematic about how I approach assessing the companies I like the look of. I am not going too detailed, as I am worried that is restrictive, and I am just using metrics as a guide rather than the decider (technical analysis is a good idea I think, but the world does not operate through a spreadsheet!). Things I am considering are:
- Dividend growth rate
- Normal Earnings Per Share (EPS) Growth
- Levered free cash flow as a proportion of turnover (as measured by Yahoo Finance)
EPS growth is important as to pay dividends, a company needs to be creating more wealth on an ongoing basis for its shareholders. Finally, free cash flow is important because the one thing that will kill a company is a lack of cash in the bank. Cash gives, as they say, 'options' i.e. you can react when things change. Companies with lots of invoices but no cash (Worldcom springs to mind), are metaphorical toast.
I put a shortlist of companies through a weighted model to see who I should be considering this time round - others, for interest, which did well were Microsoft - which has amazing global exposure, and pays a surprisingly high (for the US) dividend - and Mondi, which has had some awesome dividend growth and pays a 3.29% dividend at the time of writing.
Now, I am going to place a limit on myself to only buy a share every three transactions at most - so each year i will be able to invest 30% maximum in each company I buy into. Some would say that bold - but if the fundamentals are good, then why should I not?
Until next time!
