This Dividend Stock Might Be Just What the Doctor Ordered

Here I'll explain why I think Perrigo plc -- with its 2.3% dividend yield, long history of dividend increases and a low valuation -- is a deep-value dividend growth stock. This name checks off all three basic components of what speaks to a stock's future returns: earnings growth, change in valuation multiple, and dividends. But this name also comes with history. Perrigo dates back to the late 1800s when Luther Perrigo, the proprietor of a general store and apple-drying business, had the idea to package and distribute patented medicines and household items for country stores. Today, Perrigo generates roughly $5 billion in annual revenue and trades with a $5.6 billion market capitalization. The company operates in the health care sector as a manufacturer of over-the-counter consumer and pharmaceutical products. Its Consumer Self-Care Americas segment is made up of the U.S., Mexico and Canada consumer healthcare businesses. The Consumer Self-Care International segment includes branded consumer healthcare business primarily in Europe, but also in Australia and Israel. The Prescription Pharmaceuticals refers to the U.S. prescription pharmaceuticals business. The company generates over $4 billion in annual revenue. Perrigo on Feb. 23 increased its dividend by 6.7% from $0.225 to $0.24, marking the company's 18th consecutive year of increasing its dividend. Also, Perrigo at the start of March reported fourth quarter and full year 2020 results for the period ending Dec. 31, 2020. For the quarter, revenue declined 2.5% to $1.29 billion, $39 million lower than expected. Currency exchange fluctuations reduced results by 5%. Adjusted earnings per share fell 12.3% to $0.96. Organic sales fell 4.7% for the fourth quarter. The Worldwide Consumer segment had an organic sales decline of 3.8%, primarily due to a weaker cough and cold season. Consumer Self-Care Americas fell 4.7%, again due to lower sales for cough and cold products. Over-the-counter benefited from stronger e-commerce results, where Perrigo has a higher market share. Consumer Self-Care International fell -1.9% and had the most significant headwinds from currency exchange. Even though the fourth quarter showed declines, Perrigo performed relatively well for the year. While 2020 was a very challenging year for the global economy, Perrigo reported full-year revenue growth of 5%, reaching $5.1 billion in full-year sales. Adjusted earnings-per-share equaled $4.02 compared to $4.03 in 2019. The company remained highly profitable last year with only a fractional decline in EPS, which allowed it to increase its dividend once again. Perrigo expects to grow adjusted earnings-per-share by 7% for 2021, which will very likely lead to another dividend increase next year. Compounding Growth? In the 2010 through 2020 period, Perrigo grew EPS by an average compound growth rate 3.5% per year. However, this time period included both ups and downs. Perrigo grew earnings at a rapid pace in the years after the Great Recession ended, growing from $2.84 in 2010 to $7.24 in 2015, which turned out to be the peak. Perrigo's problems started in 2013, when the company acquired biotechnology company Elan for nearly $7 billion. This huge acquisition saddled Perrigo with lots of debt, and greatly expanded the company's pharmaceutical business -- at just the wrong time. Falling drug prices and the recent backlash against opioids in the U.S. has caused a significant deterioration in Perrigo's earnings growth. So, Perrigo has scaled back its pharmaceutical operations. Consumer health products now represent approximately 80% of total revenue. Furthermore, the company will now spin-off its pharmaceutical segment to focus on consumer products. And two weeks ago Perrigo announced that it would sell its Generic Rx Pharmaceuticals business to Altaris Capital partners for $1.55 billion. Focusing on consumer products will add stability to Perrigo, but these products typically grow at a slower rate than pharmaceuticals. Taking these items into consideration collectively, we expect 5% annual earnings growth through 2026. This implies the potential for $5.50 in earnings-per-share in the next five years. Rx for a Recession? Perrigo has a competitive advantage as one of the largest manufacturers of generics and OTC products, which gives it a leading position in its key markets. It also should hold up fairly well in a recession as consumers will always need to take their medications, even if the economy enters a downturn. During the financial crisis of 2008-2009, Perrigo generated earnings-per-share of $1.58, $1.87 and $2.84 from 2008-2010, while the dividend kept increasing every year. It appears Perrigo holds up extremely well in recessions, as consumers may gravitate more towards generics and OTC products that could be cheaper than branded pharmaceuticals. While Perrigo's earnings have fluctuated in the last decade, the dividend continues to be a steady force, having been increased every year for nearly two decades. Here's a look at the company's payout ratio over the last 10 years. In this time, Perrigo's dividend payout ratio has grown from under 10% to now over 20% of earnings. But the payout ratio remains very low, with plenty of room for future dividend increases. Value View Based on a current share price near $41.50, a $0.24 quarter dividend and $4.31 in expected EPS this year, Perrigo is currently trading hands with a 2.3% dividend yield, a 9.6 price-to-earnings ratio and around a 22% payout ratio. If earnings were to grow by 5% annually, you would expect Perrigo to earn around $5.50 per share or thereabouts after five years. Over the past decade shares have traded hands at an average valuation of about 18-times earnings. However, more recently the multiple has been lower. Using 15 times earnings implies a potential share price of about $82.50. If the dividend were to also grow by 5% per year, this would imply a $1.23 annual dividend after five years. In total you would anticipate collecting $5.50 or so in cash dividends over the next half decade. Adding together the potential share price and dividends you come to a collective value of around $88, keeping in mind that this is merely one possibility out of many. Compared to the current share price of $41.50, this works out to the possibility for 16.2% annualized returns. This could be too optimistic with a slower growth rate or lower valuation multiple, but these are not extraordinary assumptions. All this adds up to say Perrigo has proven to be a solid company that is working through some issues -- and it could be on its way back toward growth.

This Dividend Stock Might Be Just What the Doctor Ordered

Perrigo hit some bumps, but it offers deep value and dividend growth.

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