A Solid Health Care Stock to Watch?

In the health care sector, attention is generally focused on biotech companies that have upcoming regulatory catalysts. Therefore, a company engaged in the distribution and manufacture of medical equipment, medical devices, and general medical supplies may not appear to be an exciting business. However, one such company, Baxter International (NYSE: BAX  ) is certainly worth a look.

A not-so-exciting business
Although known mostly for devices and supplies for kidney dialysis, infusion pumps, and preloaded syringes and vials, Baxter derives 43% of its revenues from its bioscience segment that provides pharmaceuticals to treat immune system deficiencies, cancer, and other illnesses. Advate, a recombinant blood clotting factor, is the most important product in this segment. Under the bioscience division, the company also provides vaccines -- including one for meningitis C vaccine -- blood processing and storage systems, and bio-surgical offerings for stopping the flow of blood and tissue sealing/regeneration.

The company also works in lesser-known areas such as parenteral or intravenous (IV) nutrition. It recently won approval for one such product, Clinolipid, at the start of October.

The FDA approved Clinolipid after having earlier granted the formulation a priority review as the agency was concerned about a shortage of injectable lipid products in the market.

Not exciting but great potential
IV nutrition is among the fastest growing markets in the health care sector primarily due to the increase in the number of elderly people and rise in incidence of diseases like GI disorders, cancer, and HIV infection where survival may sometimes not be possible without IV nutrition.

It is a market with few companies competing for market share. Besides Baxter, the other three companies in this specialty niche are Fresenius Medical Care AG & Co., Hospira, and a private company, B. Braun Medical.

The global market for IV nutrition products was worth $2.7 billion in 2010, growing at a CAGR of 5.3% from 2002 to 2010. It is expected to grow at a healthy CAGR of 7.7% and touch $4.5 billion by 2017.

Baxter also has an uninterrupted record of paying dividends since 1987. It has been continuously increasing dividends over the last few years.

Apart from income distribution, Baxter has been rewarding shareholders by using available cash for reducing share count with share repurchase programs. In the last five years, the company's share count has been reducing at a steady annual rate of almost 3%.

Growing through acquisitions
Baxter is one of those biopharmaceutical companies that have adopted a growth-through-acquisitions strategy along with exploiting the potential of its core portfolio.

After having acquired Baxa Corporation and Synovis Life Technologies in 2011 and purchasing the remaining 60% of Sigma International General Medical Apparatus for $90 million in April 2012, the company completed the acquisition of the Swedish renal care company Gambro A B for $2.76 billion this past September.

Competitors
In certain markets, Baxter competes with Becton, Dickinson, a global medical technology company with a market cap of more than $19 billion. It reported net quarterly income of $301.55 million on revenue of $2.05 billion. Germany-based Fresenius Medical Care is another competitor, particularly in the kidney dialysis care and product segment. For the year ended Dec. 31, 2012, Fresenius Medical Care reported an annual income of $1.19 billion on revenues of almost $14 billion.

Conclusion
Baxter's diverse businesses are its major advantage and insurance of continued profitability. Its medication delivery products designed for delivering chemotherapeutics, antibiotics and pain relievers, and fluid and nutrition replenishment are expected to continue to be in demand in hospitals and specialty care centers. The same is true for its renal care products and IV nutrition niches where it enjoys a leadership position and limited competition. Baxter currently trades at around $65, with a dividend yield of around 3% and cash flow of $5.6 per share. Its growth story is intact. By 2015, sales are expected to grow almost 25% -- from $14.19 billion in 2012 to $17.57 billion in 2013 and $17.57 billion in 2015. Given its past record of income distribution, investors can expect the company continue increasing dividend payouts.

Baxter is a good long-term stock to watch not only for dividend investors, but also for investors looking for health care exposure in their portfolio.

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