Company Description: Owens & Minor Inc. is a leading domestic distributor of medical and surgical supplies to the acute care market, a health care supply chain management company, and a direct-to-consumer (DTC) supplier of testing and monitoring supplies for diabetes.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value (see page two of the linked PDF for a detailed description):
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
OMI is trading at a discount to 1.), 2.) and 3.) above. The stock is trading at a 14.3% discount to its calculated fair value of $32.35. OMI earned a star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible stars and three key metrics (see page two of the linked PDF for a detailed description):
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
OMI earned one Star in this section for 2.) above. The stock earned a star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 13 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
OMI earned a Star in this section for its NPV MMA Diff. of the $3,385. This amount is in excess of the $2,200 target I look for in a stock that has increased dividends as long as OMI has. If OMI grows its dividend at 13.2% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 4.1%. OMI earned a check for the Key Metric 'Years to >MMA' since its four years is less than the five-year target.
Memberships and Peers: OMI is a member of the Broad Dividend Achievers™ Index. The company's peer group includes: Cardinal Health Inc. (CAH) with a 2.1% yield, McKesson Corporation (MCK) with a 1.1% yield and Patterson Companies Inc. (PDCO) with a 1.8% yield.
Conclusion: OMI earned one star in the Fair Value section, earned one star in the Dividend Analytical Data section and earned one star in the Dividend Income vs. MMA section for a total of three stars. This quantitatively ranks OMI as a 3 Star-Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $32.47 before OMI's NPV MMA Differential decreased to the $2,200 minimum that I look for in a stock with 13 years of consecutive dividend increases. At that price the stock would yield 2.5%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,200 NPV MMA Differential, the calculated rate is 11.8%. This dividend growth rate is below the 13.2% used in this analysis, thus providing a slight margin of safety. OMI has a risk rating of 2.00 which classifies it as a medium-risk stock.
Although, OMI is well-insulated from economic cycles and the effects of health care policy reform, the company lacks a competitive advantage as a middleman in a low-growth business. Near-term results are likely to reflect tougher hospital markets. There is long-term potential in the OM Healthcare Logistics division, which provides outsourced third-party logistics services. However, it will take this division some time to achieve the critical mass it needs to break even. More disconcerting is the decline in its free cash flow payout. This will keep me for adding to my position even though OMI is trading below my $32.35 calculated fair value.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in OMI (2.9% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
- Lowe's Companies, Inc. (LOW) Dividend Stock Analysis
- United Technologies Corp. (UTX) Dividend Stock Analysis
- Harleysville Group Inc. (HGIC) Dividend Stock Analysis
- Illinois Tool Works Inc. (ITW) Dividend Stock Analysis
- More Stock Analysis
- High Yield Dividend Stocks in Gurus' Portfolio
- Top dividend stocks of Warren Buffett
- Top dividend stocks of George Soros
About the author: