Sigma-Aldrich Dividend – Slowing or Growing?

By Chad Henage - June 4, 2012 | Tickers: DD, SIAL, DOW | 0 Comments

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If you are looking for a way to play the medical field, a good option would be Sigma-Aldrich (NASDAQ: SIAL). The company's chemicals and kits are used in scientific research, hospitals, labs, and universities. The company has been around for over 60 years, and doesn't show signs of slowing down. Sigma-Aldrich also has the distinction of being one of a handful of companies to have at least 25 straight years of dividend increases. Unfortunately we've seen in the last few years, just because a company has a good dividend record, doesn't mean things won't change. Keeping that in mind, let's run Sigma-Aldrich through a few tests to see how the company covers its current dividend, and to find out what to expect in the future.

When it comes to competition, Sigma-Aldrich plays with the big boys. The company counts such heavyweights as Dow Chemical (NYSE: DOW) and E.I. Dupont de Nemours (NYSE: DD) as direct competition. Just to get an idea of how Sigma-Aldrich stacks up, look at how each company does on the following metrics:

You can see that Sigma-Aldrich doesn't pay the highest dividend, and the stock trades at a relatively high valuation compared to future growth. One reason for this disconnect is the company's free cash flow generating capabilities. Sigma-Aldrich generates more free cash flow from each $1 of assets than either of their two competitors. Another factor that I'm sure comes into play is the company's long history of dividend increases.

So now we know how the company compares to their competition, but what about the dividend? Can the company afford their current payout? The short answer is yes for now. The company only paid out about 22% of their free cash flow in the last year. However, this payout percentage has been steadily climbing. Three years ago, the company paid out just 18% of their free cash flow. While total dividends paid have increased by about 7% on average, free cash flow has decreased by just over 1% in each of the last three years. Even so, with a payout ratio of just 22%, the company isn't in trouble, this is just a trend to keep an eye on.

When it comes to dividend growth, the chart looks a little strange:

You can see in 2003 the dividend was increased tremendously, but since then the growth in payouts has been pretty consistent. In fact, the company's average dividend increase has actually sped up in the last 5 years. From 2004 – 2007, the company's average increase was 9.5%. Since 2008, the company's average dividend growth has jumped to 11.7%.

So what should investors expect in the future? With analysts calling for earnings growth of 8.46%, and the company already sporting a very low payout ratio, I would feel comfortable expecting 10-15% dividend growth for the next several years. Longer-term, the company will probably settle back closer to the 8-10% range, keeping in line with earnings growth. Since hospitals and pharmaceutical companies like to increase their R&D budget each year, Sigma-Aldrich is positioned to continually capture this growing business. However, the stock isn't exactly a bargain at over 17 times forward earnings. Investors would probably do well to wait for a pullback in the shares before investing. With Dow and Dupont both paying higher yields, and trading closer to their growth rates, I would wait for Sigma-Aldrich to trade down closer to their expected growth rate before investing.

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