Monday, August 3, 2015

Baxter and Baxalta Dividends


Something I love about dividend growth investing is that each month I get to hear about companies I own deciding to pay me more money in dividends.  Just for owning a small portion of said companies.  Not going and doing R&D for new products or technology.  Not selling any products.  Not managing any employees or inventory.  Not making sales calls.  All I had to do was have the foresight to invest some of my savings in excellent companies.  That's dividend growth investing at work!  I mean who really doesn't like getting a raise for doing nothing?

Lots of investors started piling into Baxter (BAX) once they announced the spinoff of their biotech arm into Baxalta (BXLT).  The company in its whole was a solid dividend grower with 8 consecutive years of increasing the dividend payout with a 5 year growth rate of 14.2%.  So there was lots of hope for investors to own two excellent companies in the health care space that would continue to pay and, most importantly, grow the dividend each year.  Now that the spinoff is complete management from both companies have announced the dividends that each company will pay.

Last week, Baxalta announced their first ever dividend payment.  The inaugural quarterly dividend will be $0.07, or $0.28 on an annualized basis.  For 3Q2015, management is expecting EPS of $0.48-$0.50.  That would be a payout ratio around 14% which means the dividend is well covered by earnings and potentially set to grow faster than the earnings growth rate.  Management also announced a $1 billion dollar share repurchase program which would be about 16% of the current market cap of the company.  Since I received 39 shares of BXLT from the spinoff these shares will provide $10.92 in annual dividends and carry a YOC of 0.95%.

Great news from Baxalta, although Baxter ended up being a bit disappointing.  Baxter's first dividend after the spinoff is just $0.115 or $0.46 on an annualized basis.  Management expects the standalone Baxter to earn $0.29-$0.31 in 3Q2015 which puts the payout ratio around the 38% level.  I still own 39 shares of the parent Baxter that will provide $17.94 in annual dividends and carry a YOC of 1.26%.

My total dividends have declined due to the separation of the company into two.  Dividends prior to the split were at $81.12 and are now at just $28.86 per year.  That's a pretty significant cut; however, the split into two smaller companies should allow both of them to reinvest more to spur further growth and also potentially grow the dividend at a faster rate moving forward.  The current yields for both companies are rather paltry at just 1.16% for BAX and 0.85% for BXLT which makes them less attractive as investments.  I plan to hold both companies moving forward despite the decrease in dividends to see how the standalone companies perform and to see what kind of dividend growth they provide.  It's a bit disappointing to see an overall dividend decrease but both are excellent companies in one of the few industries that is projected to grow quickly over the next 20 years.

My FI Portfolio's forward-12 month dividends are down to $5,997.28 and including my Loyal3 portfolio's forward dividends of $56.93 brings my total taxable account forward dividends to $6,054.21.

Image courtesy of digitalart on FreeDigitalPhotos.net.

8 comments:

  1. Its interesting to note how things are progressing with BAX and BXLT. The dividend cut seems painful right now, but as you said - its well covered based on the payout ratio, if you can hold thru these levels, im sure things will look much better in the future.

    Best wishes
    R2R

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  2. I am holding my shares as well.

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  3. Do the two companies have a larger combined market cap? Sometimes these spinoffs "unlock value".

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  4. I'm a holder of both for now. As you say, I'm not real impressed by the recent dividend announcement but the payout ratio is nice. I'll be looking at the earnings over the next few quarters to see if I will stick with them or run to the hills.

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  5. Good news for holders of BXLT this morning. Luckily, I sold two-thirds of mine yesterday.

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  6. It's always nice when a spin off also pays a dividend. I have held every spin off received, even the one that doesn't pay a dividend. From my portfolio I have ALLE, MDLZ, ABBV and HYH (no div).

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  7. Hey PIP,

    I was pretty disappointed with Baxter's dividend announcement. I was expecting the dividend do decrease to a 3% yield or so, but just over 1% won't cut it for me... As I'm still in the accumulation phase, I think it's important to have a relatively high dividend yield (averaging between 3.5 and 4%). I sold my entire position in both companies earlier today. It's a shame that I had to sell them a few months after starting a position, but at least I made a healthy profit from the transactions. Can't complain!

    However, in your situation I would have done like you, and hold off to see how the two separate companies grow. Baxalta looks particularly promising!

    Dividend Legion

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  8. I sold my shares. The dividend cut was quite disappointing. In the long run, these companies should do well enough, so for younger investors with more time, I think they'll be fine. As for me, I need a better yield than what's on offer now.

    Cheers
    FerdiS

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