Dear Mr. Berko: What is your opinion of Owens & Minor, which is in the medical supply business? I have $9,600 in cash sitting in my individual retirement account, and my dopey stockbroker, who has never been right in 12 years, recommends 400 shares. Please advise ASAP.
— B.C., Oklahoma City
Dear B.C.: Oftentimes customers become confused about who is the dope.
Companies selling noninvasive medical supplies to the end user (hospitals, research labs, clinics, physician/patient cooperatives) can have some of the most attractive risk-adjusted returns on the market. Medical supplies are non-discretionary necessities, and their revenues tend to be insulated from inflationary pressures, the business cycle and political interference. And unlike the pharmaceutical industry, medical supply companies have low capital needs relative to net income, which presages robust free cash flows and strong balance sheets. As a result, some of the public companies in this industry provide shareholders with less volatile and more dependable future returns compared with most other market sectors.
Owens & Minor (OMI-$19) was founded in 1882 by O.O. Owens and G.G. Minor. This Fortune 500 company, with $9.5 billion in expected 2017 revenues, dispenses over 220,000 various medical and surgical supplies from 52 warehouses to over 4,400 hospitals and integrated health care networks. Wall Street believes that in 2018, OMI will sell over $10 billion worth of stuff. That stuff includes exam room products, staff and patient apparel, anesthesia appliances, measuring devices, waste receptacles, mobile work stations, treatment and instrument tables, IV stands and accessories, blanket warmers, incontinence products, wound treatment and dressing products, professional disposables (gloves, needles, masks, booties) — nearly all the noninvasive supplies a hospital and staff need to treat a patient from admission to discharge.
OMI’s revenues have increased in 18 of the past 20 years, and earnings have improved in 16 of those 20 years. However, OMI’s earnings for the third quarter will be lower because of recent merger and acquisition expenses, plus nonrecurring costs. OMI has enjoyed a good run since trading at $6 in 1997. It split once (three-for-two), and the dividend, 11 cents 20 years ago, has been increased in each of the past 20 years, to $1.03 today. Going out to 2022, OMI analysts expect revenues of $11.5 billion, earnings of $4.70 a share and a dividend of $1.25. Based on today’s price, that increased dividend would have a darn attractive 6.5 percent yield.
