Owens & Minor (OMI) is well-positioned to participate in the demographic opportunity of an aging population. Moreover, they seem to be very resistant to economic cycles and potential changes from health care reform. This is evidenced by their consistent long-term record of above-average earnings and dividend growth. The correction in their stock price valuation over the past year has brought them into fair value range at current levels, in our opinion. Consequently, we believe that prudent dividend growth investors might want to look deeper into this above-average yielding Dividend Contender with room to grow.
This article looks at Owens & Minor Inc (OMI), a Dividend Contender, through the lens of the F.A.S.T. Graphs™ Fundamentals Analyzer Software Tool. Since a picture is worth a thousand words, the reader will be provided the "essential fundamentals at a glance" expressed vividly in pictures. In order to provide you the opportunity to research this company deeper and faster we are providing a link to a live, fully functioning earnings and price correlated set of graphs Found Here. (Tip: Run your mouse over the various lines and watch the graphs come to life).
A Dividend Contender is defined as a company that has increased its dividend for a minimum of 10 - 24 straight years. Owens & Minor Inc is a Dividend Contender that has raised its dividend every year for 15 consecutive years. The complete Dividend Contenders list is compiled courtesy of David Fish. (Open as an excel spreadsheet and look at the tabs on the bottom to find the Dividend Contender list).
About Owens & Minor Inc: from their website
"Owens & Minor, Inc., (NYSE: OMI) a FORTUNE 500 company headquartered in Richmond, Virginia, is a leading national distributor of name-brand medical and surgical supplies and a healthcare supply-chain management company. Owens & Minor is also a member of the Russell 2000® Index, which measures the performance of the small-cap segment of the U.S. equity universe, as well as the S&P MidCap 400, which includes companies with a market capitalization of $1 billion to $4.4 billion that meet certain financial standards. With a diverse product and service offering and distribution centers throughout the United States, the company serves hospitals, integrated healthcare systems, alternate site locations, group purchasing organizations, healthcare suppliers, and the federal government. Owens & Minor provides technology and consulting programs that improve inventory management and streamline logistics across the entire medical supply chain -- from origin of product to patient bedside."
Owens & Minor Inc: A Dividend Contender with 15 Consecutive Years of Dividend Increases
Learning from the Past - Looking at Earnings Only
Since dividends are paid out of earnings, a clear perspective of a company's historical earnings growth record is a vital component of a dividend investor's prudent due diligence process. The following graph plots Owens & Minor Inc's earnings per share since 1998. A quick glance to the right of the graph shows that Owens & Minor Inc has increased earnings at a compounded rate of 11.7% (see purple circle on graph) per annum.
Earnings Determine Market Price and Dividend Income: The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings to both price movement and dividend income. The earnings growth rate line or True Worth ™ line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.
Since dividends are paid out of earnings, and therefore represent additional return on top of what the market capitalizes earnings at, they are depicted by the light blue shaded area and stacked on top of the earnings line. Therefore, a quick visual of these two important components is simultaneously revealed:
1. The additional return that dividend paying stocks provide.
2. The percentage of earnings paid to shareholders as dividends (payout ratio).
The value in this article is through carefully analyzing the earnings and price correlated fundamentally based graphs. Notice that one glance tells you how well the company has performed on an operating basis historically and how the market valued that historical performance. Therefore, the reader is free to discover whether or not current valuations make sense based on historical norms coupled with fundamental values. Instead of opinion, this article is designed to produce facts that can be analyzed to the readers investing benefit.
Performance Table: Capital Appreciation and Dividend Income Owens & Minor Inc
The associated performance results with the earnings and price correlated graph, validates the above discussion regarding the two components of total return: Capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.
When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 8.2% capital appreciation (Closing Annualized ROR), long-term shareholders of Owens & Minor Inc would have received an additional $54,010.23 in dividends that increased their total return from 8.2% to 9.4% per annum.
(Note: Since this is a Dividend Contender it has raised its dividend every year for at least 10-24 years, therefore, negative dividend growth rates shown, if any, will be attributed to special additional dividends paid in excess of the company's regularly reported dividend rate)
The following graph plots the historically normal PE ratio (the dark blue line) correlated with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as normal as it has been since 1998.
A further indication of valuation can be seen by examining a company's current price to sales ratio relative to its historical price to sales ratio. The current price to sales ratio for Owens & Minor Inc is .22, which is historically normal.
Looking to the Future
Extensive research has provided a preponderance of conclusive evidence that future long-term returns, and the dividend and its growth rate are a function of two critical determinants:
- The rate of change (growth rate) of the company's earnings
- The price or valuation you pay to buy those earnings
Therefore, forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance.
Therefore, it logically follows that measuring performance without simultaneously measuring valuation is a job half done. At its current price, which is attractively aligned with its True Worth™ valuation, Owens & Minor Inc represents a potential opportunity to invest in a Dividend Contender at a reasonable price. The important factor is that Owens & Minor Inc has real assets and cash flow underpinning its stock price. This solid economic foundation offers shareholders the potential for both a strong margin of safety and an opportunity for an increasing dividend income stream and potentially attractive future returns.
The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.
The consensus of 11 leading analysts reporting to Capital IQ forecast Owens & Minor Inc long-term earnings growth at 8.5%. Owens & Minor Inc has low long-term debt at 19% of capital. Owens & Minor Inc is currently trading at a P/E of 14.9, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Owens & Minor Inc's True Worth valuation would be $46.77 at the end of 2017, which would be a 10.8% annual rate of return from the current price, including assumed dividends.
Earnings Yield Estimates
Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price and dividend income in the long run, we expect the future earnings of a company to justify the price we pay.
Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in Owens & Minor Inc to an equal investment in 10-year Treasury bonds illustrates that Owens & Minor Inc's expected earnings would be 5.3 times that of the 10-Year T-Bond Interest. (See EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.
This report presents essential "fundamentals at a glance" on Dividend Contenders Owens & Minor Inc, illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although with just a quick glance you can know a lot about the company, it's imperative that the reader conduct his or her own due diligence in order to validate whether the consensus estimates seem reasonable or not. Follow the link we provided at the beginning of this article to a fully functioning F.A.S.T. Graphs™ on Owens & Minor Inc.
Summary & Conclusions
Owens & Minor Inc represents a blue chip dividend contender with an above-average dividend yield and an attractive current valuation. With earnings and dividends both expected to grow at above-average rates, Owens & Minor looks to be a classic buy and hold opportunity for the conservative dividend growth investor interested in an above-average and growing yield at an attractive valuation. Therefore, we believe this quality dividend growth stock to be worthy of deeper scrutiny.
Disclosure: No position at the time of writing.
