Australia | May 21 2012
– ResMed announces the introduction of dividends
– Yield viewed as a positive for some investors
– Move also seen as a sign of fewer growth options
By Chris Shaw
Having previously resisted the idea of paying out funds to shareholders, sleep disorder group ResMed ((RMD)) last week surprised the market to some extent by announcing it would commence paying dividends from the first quarter of 2013.
The payout will stat at US17c per share of common stock, which RBS Australia estimates will translate to a payment of around 6.9c per share in Australia. Assuming a full year dividend of US68c the payout would be a ratio of around 35%.
The reaction to the dividend announcement by brokers covering the stock has been mixed. Deutsche Bank is generally positive, viewing the announcement as evidence cash generation for ResMed remains strong and company earnings are sustainable.
Citi has similarly reacted positively to the news, seeing the commencement of dividends as an attraction for new shareholders who avoided the stock given a lack of yield and a means for the company to put excess capital to use. The combination of dividends and further share buybacks should be a positive in Citi's view.
BA Merrill Lynch also sees some positives in that the dividend is a tangible unlocking of ResMed's balance sheet, which is healthy given a net cash position of $540 million as of the third quarter of this year and around US$80 million in free cash flow each quarter.
But RBS took a more neutral view, suggesting some investors will be positive on the move as it is a case of management acknowledging the company has more money than it needs, while also suggesting other investors may take the view the move to dividend payments is a sign ResMed's business is maturing and growth options are fading. UBS similarly saw a split reaction to the dividend news as likely.
Factoring the dividend into broker models results in minor changes to earnings estimates, which translates to modest changes in price targets. The FNArena database shows a consensus target for ResMed now of $3.57.
What hasn't changed is broker ratings, the database showing ResMed is rated as Buy and Hold four times each. Citi sums up the Buy argument by noting ResMed currently trades on a 12-month forward earnings multiple of 14 times, which is considered attractive given forecast earnings per share (EPS) growth of 13% this year, 30% in FY13 and 20% in FY14.
RBS argues the value in ResMed isn't as attractive based on normalised EPS growth forecasts of around 8% this year, 14% in FY13 and 7% in FY14. With global medical technology companies offering three-year EPS growth of about 15% and trading on more attractive earnings multiples than ResMed at present, RBS suggests upside from current levels is limited.
BA-ML sides with RBS, suggesting while the addition of a yield is a positive for ResMed shareholders the total return is still not enough to justify a more positive rating than the broker's current Neutral recommendation.
Shares in ResMed as at 10.50amare down 3c at $3.23 in a stronger overall market. Over the past year ResMed has traded in a range o $2.36 to $3.44, the current share price implying upside of around 10% relative to the consensus price target in the FNArena database.
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