Utah Medical (UTMD, Financial) has been a regular portfolio holding in recent years. It is very thinly traded and periodically sells off for little or no reason. Nonetheless, I've always taken advantage of these opportunities to make money owning the shares.
In the past, I have made no secret of my admiration for the company and its fundamentals. This was based in large part on management's intelligent use of cash.
So naturally, I decided to take a look at Utah Medical shares after the recent pullback. With 3.6 million shares outstanding (down from 5 million in 2001), UTMD has a paltry $94 million market value. With over $20 million in NET cash and investments, $6 to $8 million in annual free cash flow, and a hefty (3.5%) dividend yield, what's not to like?
Well, there is one thing.
As with many steady-state companies with high cash flows and the resulting excess capital, the normal routine can get boring. Many start looking for a little excitement. Some search out wealth-destroying acquisitions. Progressive (PGR) likes to add to its collection of modern art. The following excerpts from Utah's SEC filings show a different practice (emphasis added).
Often wrong, but never in doubt? Who knows... look at the history and draw your own conclusions. Allocating company funds in the is way will be characterized as insignificant and/or harmless, but it raises questions for this investor.
Why use excess capital in this manner? Is it worth the extra disclosure and time/distraction involved? Does UTMD management have some talent for stock selection? Better things to do? Do shareholders really want excess capital used in this way? Why not use the money for dividends and/or buybacks instead? Is it a coincidence that share repurchases have all but stopped since mid-2009?
In short... Why? It seems so random and seemingly out of character.
Frankly, I'd prefer management focus on running the firm. And I'd prefer excess cash be paid out to shareholders. And Utah Medical has a history of doing just that, which is why this development in recent years has me confused.
My questions regarding this issue have been rebuffed or ignored. Hey, I can take a hint.
At this price, I would usually be purchasing Utah Medical, but not this time. I like the "old" Utah Medical, where shareholders made their own stock selections... with their own money.
Besides I prefer Northrop Grumman (NOC, Financial)! They just raised their dividend 9% and are actively repurchasing shares.
Perhaps UTMD should stop playing around and do the same?!
Disclosure: Long NOC.
Henry W. Schacht
http://www.lonelyvalue.com/
In the past, I have made no secret of my admiration for the company and its fundamentals. This was based in large part on management's intelligent use of cash.
So naturally, I decided to take a look at Utah Medical shares after the recent pullback. With 3.6 million shares outstanding (down from 5 million in 2001), UTMD has a paltry $94 million market value. With over $20 million in NET cash and investments, $6 to $8 million in annual free cash flow, and a hefty (3.5%) dividend yield, what's not to like?
Well, there is one thing.
As with many steady-state companies with high cash flows and the resulting excess capital, the normal routine can get boring. Many start looking for a little excitement. Some search out wealth-destroying acquisitions. Progressive (PGR) likes to add to its collection of modern art. The following excerpts from Utah's SEC filings show a different practice (emphasis added).
As of December 31, 2006 all of the Company’s investments are held in Fidelity Cash Reserves (FDRXX). - 2006 10kLockheed Martin, anyone? How about some ETF's?
As of March 31, 2007, all of the Company’s investments are held in Fidelity Cash Reserves.
As of June 30, 2007, all of the Company’s investments are held in Fidelity Cash Reserves.
As of September 30, 2007, all of the Company’s investments are held in Fidelity Institutional Money Market Treasury Portfolio – Class 1 and Fidelity Cash Reserves.
(So far, so good.)
As of December 31, 2007 the Company’s investments are in Fidelity Instl Treas Port Cl I (FISXX), Citigroup (C) and Washington Mutual (WM). - 2007 10k
(Oops... a failed attempt at finding yield?)
As of March 31, 2008, the Company’s investments are held in Fidelity Instl Treas Port Cl I (FISXX), Fidelity US Gov’t Reserves (FGRXX), Fidelity Cash Reserves (FDRXX), Citigroup (C) and Washington Mutual (WM).
As of June 30, 2008, the Company’s investments were held in Spartan S/T Treas Bd Fid Advantage Class (FSBAX), Fidelity Instl Treas Port Cl I (FISXX), Fidelity US Gov’t Reserves (FGRXX), Fidelity Cash Reserves (FDRXX), Citigroup (C) and Washington Mutual (WM).
As of September 30, 2008, the Company’s investments were held in Fidelity Cash Reserves (FDRXX), Citigroup common stock (C) and Washington Mutual common stock (WM). As noted in MD&A, UTMD wrote off the WM investment following WM’s liquidity failure.
(Right about here, I thought UTMD had learned its lesson.)
As of December 31, 2008 the Company’s investments are in Fidelity Cash Reserves (FDRXX), General Electric (GE), Citigroup (C) and the surviving remnant of Washington Mutual (WAMUQ). - 2008 10k
In 2008, average interest rates were substantially lower and the Company realized an investment loss of $718 due just to the failure of Washington Mutual (WM) savings and loan. UTMD recognized capital gains and corporate dividends of $306 on other common stock investments which helped offset the loss. The WM holding represented about 3.5% of UTMD’s investment portfolio at cost. Capital gains (or losses) and dividends from investments in common stocks were ($407) in 2008, $20 in 2007 and $593 in 2006. The capital gains in the two earlier years allowed the loss in 2008 to be fully tax-deductible. The Company also holds investments in CitiCorp (C) and General Electric (GE) common stock which together were about $405 below their aggregate purchase price at the end of 2008. When purchased, these holdings at cost represented less than 3% of UTMD’s total investment portfolio. Unless one or both of the companies fail, as was the case with WM, UTMD will not sell the holdings at current prices, expecting that they will recover in value, and therefore will not have an associated NOI loss which impacts earnings. Currently, 99% of UTMD’s cash investments are being held in interest bearing money market securities yielding only about 1.0%.
(Got any Krispy Kreme - KKD you bought in 2003? It'll come back. Whatever you do, don't take a loss!)
As of March 31, 2009, the Company’s investments are held in Fidelity Cash Reserves (FDRXX), Citigroup (C) and General Electric (GE).
(Progress? Alas, no.)
As of June 30, 2009, the Company’s investments are held in Fidelity Ginnie Mae (FGMNX), Fidelity Cash Reserves (FDRXX), Citigroup (C), Exxon Mobil (XOM)and General Electric (GE).
As of September 30, 2009, the Company’s investments were held in Fidelity Cash Reserves (FDRXX), Fidelity Inst MMKT Port CL 1 (FMPXX), Citigroup (C) and General Electric (GE).
As of December 31, 2009 the Company’s investments are in Fidelity Cash Reserves (FDRXX), Fidelity Institutional Money Market (FMPXX), General Electric (GE), and Citigroup (C).
As of March 31, 2010, the Company’s investments are held in Fidelity Cash Reserves (FDRXX), Fidelity Institutional Money Market (FMPXX), Citigroup (C), General Electric (GE), Ishares Barclays TIPS (TIP), Lockheed Martin Corp (LMT) and SPDR Barclays Capital TIPS (IPE).
Often wrong, but never in doubt? Who knows... look at the history and draw your own conclusions. Allocating company funds in the is way will be characterized as insignificant and/or harmless, but it raises questions for this investor.
Why use excess capital in this manner? Is it worth the extra disclosure and time/distraction involved? Does UTMD management have some talent for stock selection? Better things to do? Do shareholders really want excess capital used in this way? Why not use the money for dividends and/or buybacks instead? Is it a coincidence that share repurchases have all but stopped since mid-2009?
In short... Why? It seems so random and seemingly out of character.
Frankly, I'd prefer management focus on running the firm. And I'd prefer excess cash be paid out to shareholders. And Utah Medical has a history of doing just that, which is why this development in recent years has me confused.
My questions regarding this issue have been rebuffed or ignored. Hey, I can take a hint.
At this price, I would usually be purchasing Utah Medical, but not this time. I like the "old" Utah Medical, where shareholders made their own stock selections... with their own money.
Besides I prefer Northrop Grumman (NOC, Financial)! They just raised their dividend 9% and are actively repurchasing shares.
Perhaps UTMD should stop playing around and do the same?!
Disclosure: Long NOC.
Henry W. Schacht
http://www.lonelyvalue.com/
