Smith & Nephew Wows With A 50% Dividend Increase

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By

Nate Weisshaar

Published in Company Comment on 2 August 2012

… and things are going well in the business as well.

Smith & Nephew (LSE: SN) pleased the market today by announcing a 50% increase to the interim dividend and a new progressive dividend policy that could significantly improve the shares' currently unimpressive 2% dividend yield.

Compared to other big names in the healthcare sector like FTSE 100 (UKX) stalwarts GlaxoSmithKline (LSE: GSK) and AstraZeneca (LSE: AZN), which boast yields of 4.6% and 3.8% respectively, Smith & Nephew is downright disappointing if you're an income investor.

However, one year into new CEO Olivier Bohuon's restructuring plan, the company's margins are showing improvement, which is translating to stronger cash flow -- free cash flow (cash from operations less spending on capital) was up 26% in the quarter. This, along with the £66 million in cash from the sale of a 51% stake in the company's experimental biologics business, helped pay down £133 million in debt in the quarter and provide the company with a net cash balance of £96 million.

Bohuon had previously said excess cash would be aimed at acquisitions to complement the company's newly focused research efforts, but the Board has apparently heard the appeals from shareholders for some sharing of the wealth.

Even with this newfound generosity Smith & Nephew likely won't be topping income investors' wish lists, but this free report from The Motley Fool -- "8 Shares Held By Britain's Super Investor" -- offers up some of the shares favoured by one of the UK's most successful income investors. Click here to download your free copy today.

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> Nate does not own any shares discussed above. The Motley Fool owns shares of Smith & Nephew.

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Comments

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F958B 02 Aug 2012 , 1:03pm

A reasonable dividend payout would broaden the range of investors interested in the shares, which may subsequently cause a re-rating of the shares due to new buyers coming in.

The yield doesn't need to be super-high because it should be reliable due to relatively dependable revenues; I'd rather accept a medium yield which is reliable than a high yield which soon disappears under the stress of a recession.

Dividend cover at 2.5x would be a good compromise between pleasing the dividend seekers and having enough capital to grow the business at a good rate. At the moment the cover seems to be on course for 3x, which is still a little excessive and seems to still run the risk of the board frittering investor cash.
I actually think that fairly low dividend cover can be good - it limits the capital available to the empire-building, big-ego directors and forces the board to invest the modest amount of excess cash into only the most promising projects.

TMFTheSnake 03 Aug 2012 , 9:22am

Great points, and I do generally fear a CEO sitting on a large pile of cash. However, with S&N in the midst of a significant shift in operations (a push into emerging markets both on the sales side and R&D/manufacturing) a larger than normal cash cushion may be wise - at least in the near term.

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