Owens & Minor Inc.: Irresistible Yield, Irresistible Valuation

Introduction

Recently, I have had several requests to write an article about Owens & Minor Inc (OMI). I had not looked at this company in a while, and boy oh, boy, was I surprised at what I found. Owens & Minor is on the “Dividend Contender” list produced by David Fish. Owens & Minor has raised its dividend for 20 consecutive years which leaves it only 5 years away from “Dividend Champion” status. Therefore, I consider Owens & Minor a classic dividend growth stock that is extremely undervalued.

Nevertheless, the majority of high-quality dividend growth stocks (Champions, Contenders and Challengers) are being richly-valued by the market today, but not Owens & Minor. Consequently, I was thrilled to discover that Owens & Minor was available at a very attractive blended P/E ratio of only 12 and is currently available at the highest dividend yield the company has ever offered in its history.  Both of those valuation metrics are too compelling to ignore.

As a result, I believe that Owens & Minor represents a compelling long-term investment opportunity. Moreover, I further believe that the market has dramatically overreacted to negative issues that I contend are mostly temporary in nature. Yes, Owens & Minor did lose an important customer (Kaiser), and yes, their industry has suffered from price pressure and competitive bidding. However, they have made several acquisitions that promise to replace those revenues, and management has reported that pricing is beginning to normalize.

Therefore, the bottom line is that Owens & Minor is currently a compelling long-term dividend growth and total return opportunity. Moreover, I want to be clear that the most compelling opportunity I see with Owens & Minor is with its valuation. Simply stated, it is Owens & Minor’s low valuation that has created the highest dividend yield that the company has ever offered. Furthermore, it is Owens & Minor’s low valuation coupled with its current reorganization and numerous acquisitions that has created a rare and compelling total return opportunity with an above-average current and growing dividend yield.

Owens & Minor, Inc. At a Glance

Owens & Minor is the smallest of the premier healthcare distributors. Healthcare is undeniably a high growth industry due to compelling demographics.  However, Owens & Minor does business in a segment of the healthcare industry that offers highly commoditized medical consumables. Owens & Minor sells low tech consumable medical products such as disposable gloves, surgical gowns, syringes, sterile trays, etc.

Consequently, Owens & Minor generates razor thin net profit margins and only moderate gross profit margins. However, thanks to the demographic forces referenced above, the company has been steadily-increasing gross revenues at approximately a 5% rate. Additionally, I consider the company a quasi-cyclical earnings and cash flow generator but with a strong dividend growth record.

“Owens & Minor Description Courtesy Zacks:

Owens & Minor, Inc. is a global healthcare solutions company dedicated to Connecting the World of Medical Products to the Point of CareSM by providing vital supply chain services to healthcare providers and manufacturers of healthcare products.

Owens & Minor provides logistics services across the spectrum of medical products from disposable medical supplies to devices and implants. With logistics platforms strategically located in the United States and Europe, Owens & Minor serves markets where three quarters of global healthcare spending occurs.