Dividend Growth Stock Overview: Owens & Minor Inc.

Photo: Freeimages.com/Michelle Morales

About Owens & Minor Inc.

Owens & Minor is a logistics provider focusing on serving the healthcare industry. The company provides logistics and inventory management services, and supplies products for healthcare providers and manufacturers of healthcare products. The company is headquartered in Richmond, VA and employs 7,800 people in the United States and Europe.

Owens & Minor was founded in 1882 as a drug wholesaler and incorporated in 1926. In the 1960s, the company expanded into medical devices and equipment. Owens & Minor divides its operations into two geographic business segments: the Domestic and the International. The segments are similar – Owens & Minor has agreements with nearly 1,900 suppliers from which it sources medical supplies. The company also has a proprietary brand, MediChoice, which it offers to customers through its 68 distribution centers, two-thirds of which are in the United States. Owens & Minor has 2 packaging centers in the United States and 1 in Europe that it uses to produce surgical kit trays. With a wide geographical dispersion in distribution centers, the company prides itself on being able to customize delivery schedules to the needs of its customers.

Internationally, Owens & Minor sells products and provides services to customers in over 90 countries and has operations in 12 European countries: Belgium, the Czech Republic, Denmark, France, Germany, Ireland, The Netherlands, Portugal, Slovakia, Spain, Switzerland, and the United Kingdom. The vast majority of the company’s revenues come from the Domestic Segment – only 5.2% of the company’s 2014 net revenues came from the International Segment. This will likely increase in the future as the International Segment will include the operations from the November 2014 acquisition of ArcRoyal, a privately held surgical kitting company based in Ireland.

As a player in the healthcare industry, Owens & Minor is subject to effects from the trends that are occurring in the industry. One of those is the consolidation and merging of healthcare companies, which presents a risk for Owens & Minor. Over a quarter of Owens & Minor’s revenues come from products supplied by two companies: Covidien and Johnson & Johnson Health Care Systems. More than 50% of product sales are to group purchasing organizations, specifically Novation, LLC; MedAssets, Inc.; Premier, Inc.; and HealthTrust Purchasing Group. Product sales are made under 3 to 5 year contracts to these organizations, and the contracts have 1-year renewal options.

During the reporting of 3rd quarter earnings, Owens & Minor reiterated its guidance for full year non-GAAP earnings of $1.85 – $1.95 per share, up 8% from $1.76 for the same period in 2014. The company also provided EPS guidance for 2016 of $2.00 – $2.05. 2015 revenues are being impacted by the strong U.S. dollar, which accounted for a 10% drop in international revenues over the first three quarters of 2015.

Based on the projections for 2015 EPS, Owens & Minor has a payout ratio of 53%.

Owens & Minor has an active share repurchase program. In February 2014, the company authorized the repurchase of up to $100 million of stock no later than February 2017. By the end of 2014, the company had used $10.3 million of the allocation. At current prices, the remaining $89.7 million could purchase about 2.5 million shares of stock, which represents about 4% of the outstanding shares.

Long term, the company is seeking to refocus its efforts to reduce overhead costs and renew its business, with a goal of averaging 8 – 10% earnings growth annually. It is looking to save $2 million a year by reducing the number of European distribution centers from 16 to 9. As a services and products middleman, Owens & Minor is getting squeezed by pricing pressures on the supplier and customer side, according to a recent investor presentation. In response, the company is looking to reposition itself as a “global healthcare services company” by reducing overhead costs (as noted above), and identifying and providing services that only a company of its size can. The company’s ability to make this transition and negotiate the transformation of the healthcare industry successfully will determine whether Owens & Minor can continue to grow its dividend.

The company is a member of the S&P Mid Cap 400 and Russell 2000 indices and trades under the ticker symbol OMI.

Owens & Minor’s Dividend and Stock Split History

Owens & Minor Dividend Growth

Medical supplies logistics firm Owens & Minor has grown dividends at over 12% since beginning its run of annual dividend growth in 1997.

Owens & Minor has paid dividends since at least 1972 and increased them since 1998. The company announces annual dividend increases in mid-February, with the stock going ex-dividend in mid-March. In February 2015, Owens & Minor announced a very small 1.0% dividend increase to an annualized rate of $1.01 per share. The company should announce its 19th consecutive annual dividend increase in February 2016.

Despite the slow dividend growth in 2014 and 2015 – presumably due to the company ingesting the recent acquisitions, Owens & Minor has established a good dividend growth record. Since beginning its run of annual dividend growth in 1997, Owens & Minor has compounded dividends at an average rate of 12.56% annually. Over the last 5 years and 10 years, the compounded rate has been 7.41% and 11.29%, respectively.

Owens & Minor has split its stock several times since the mid-1970s. Specifically, the company split its stock 5-for-4 in August 1976; 2-for-1 in September 1982; and 3-for-2 in July 1985, May 1988, June 1991, February 1993, and May 1994. The company also issued stock dividends of 50% in June 1975 and February 2010, and 10% in February 1981 and March 1982. Had you purchased shares of Owens & Minor prior to mid-1975, each one would have split into 51.68 shares of stock. Had you purchased shares of the company when Owens & Minor began its run of dividend growth in 1997, you would have received the 50% stock dividend in February 2010.

Over the 5 years ending on June 30, 2015, Owens & Minor Inc. stock appreciated at an annualized rate of 6.67%, from a split-adjusted $24.44 to $33.75. This dramatically underperformed both the 16.3% compounded return of the S&P Mid Cap 400 index and the 15.70% compounded return of the Russell 2000 index over the same period.

Owens & Minor’s Direct Purchase and Dividend Reinvestment Plans

Owens & Minor has both direct purchase and dividend reinvestment plans. You don’t need to be a current shareholder to participate in the plans – you can make your initial purchase through the plan. The minimum investment for the initial direct purchase is $200 and $25 for follow-on direct purchases. The dividend reinvestment plan allows for full or partial reinvestment of dividends.

The plans’ fees are favorable for investors. While there is a one-time $10 fee for new enrollees, Owens & Minor picks up all the costs of investing in the company’s stock for both direct purchases and purchases through the reinvestment of dividends. When you sell your shares, you’ll pay a transaction fee of $5 plus a commission of 10 cents per share for batch orders (where you do not control when or at what price the stock is sold). For all other types of sell orders, you’ll pay a transaction fee of $25 plus a commission of 12 cents per share. You’ll also pay an additional $15 if you go through a phone agent to sell your shares. All fees will be deducted from the sales proceeds.

Helpful Links

Owens & Minor Inc.’s Investor Relations Website

Current quote and financial summary for Owens & Minor Inc. (finviz.com)

Information on the direct purchase and dividend reinvestment plans for Owens & Minor Inc.

 

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3 Comments

  1. Big fan of OMI as a non-traditional play on the health care sector since they provide the logistics of getting goods to where they’re needed. I wish the valuation was a bit better and the slowing dividend growth has me a bit concerned as well. I’d probably need to see a return to at least high single digit dividend growth prior to investing in this otherwise excellent company.

    • Jason says:

      JC:
      Thanks for the comment. I agree – I like companies related to the healthcare industry, particularly with our aging population. Like you, I’d like to see OMI get a little cheaper or make more progress on their restructuring. I doubt we’ll see OMI with a yield in the high single digits, at least not with interest rates as low as they are right now.

      Cheers,
      HD

  2. Thanks for bringing the company to my attention. I’m not too familiar with them and as JC said above, I like the fact that they dominate a niche/different sector of the healthcare industry. I’m guessing they are marching their way towards becoming a Dividend Aristocrat and if they stay the course they will hit it within the next decade. With that being said, their current price multiple is a little too high for me and I am going to look elsewhere as there are plenty of other great companies trading at a discount compared to the market. However, if the price falls and the yield pops above 3%, I may look to initiate a stake.

    Great analysis. Keep up the great work. Much appreciated.

    Bert