In this article I’m going to explain why I think Smith & Nephew’s (LSE: SN) a top stock for sensible investors to buy right now. In doing so I’ll consider four critical characteristics: its valuation, dividend policy, balance sheet, and its growth prospects in the near term and beyond.
Growth Story Smith & Nephew’s one of the biggest players in the realm of artificial joints and limbs, advanced wound care, and has an increasing role in the world of surgical robotics.
Profits have been pressured more recently because of subdued demand in Smith & Nephew’s core US marketplace, and looking ahead, the trouble created by trade wars threatens some more stress across both its developed and emerging markets. This is why City analysts are expecting fractional bottom-line growth in 2019.
That said, I consider this Footsie share’s long-term growth outlook to be mightily compelling. In particular, a combination of exploding global population growth and rising healthcare spend in bright new markets like China promises to drive profits at this Footsie firm skywards in the years ahead. The number crunchers expect things to start rolling with annual earnings expansion revving to 7% in 2020.
Valuation Now the medical giant certainly appears a tad expensive on paper, its shares trading on a forward P/E ratio of 22 times compared with the accepted value benchmark of 15 times and below. A high price has been created by Smith & Nephew’s electric price run over the past 12 months (it’s up 66% as I type) which leaves it trading at record highs.
Balance Sheet It’s got plenty of financial firepower right now to keep growing dividends and to continue making earnings-boosting acquisitions as well. Cash conversion stood at a mighty 85% in 2018, whilst its net debt-to-adjusted EBITDA ratio stood at just 0.8 times.
And the business remains extremely proactive in putting that balance sheet to work by making some significant acquisitions. It made yet another move on this front earlier in July with the takeover of Switzerland’s Atracsys Sàrl, a maker of optical tracking technology that’s used in computer-assisted surgery.
Dividend Policy The healthcare giant doesn’t have the most storied of dividend policies on the FTSE 100, however.
Firstly, its decision to freeze the full-year payout in 2016 means it doesn’t have the longest-running progressive policy out there. Secondly, dividends at Smith & Nephew (LON:SN) haven’t exactly flown higher in recent times, the annual sum rising a mere 3% last year to 36 US cents per share.
And lastly, whilst Smith & Nephew’s expected to keep its recent run of dividend rises going — City analysts anticipate a payout of 38 US cents this year and 41 cents in 2020 — those chunky share price gains of the past year leave yields for these years sitting at 1.7% and 1.8% respectively.
It’s a buy! It’s clear that, on paper at least, Smith & Nephew doesn’t provide an abundance of bang for your buck, either in terms of earnings multiple or dividend yield.
But there’s a reason why investors have been piling into the business en masse in recent months: its rising might in a white-hot medical segment and a resumption of brilliant profits growth in emerging regions. So forget about its high price, I say. I reckon this FTSE 100 favourite has all the tools to provide stunning returns in the years ahead.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019