Dividend Aristocrats In Focus Parts 30: Sigma-Aldrich

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Oct 28, 2014
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In part 30 of the 54 part Dividend Aristocrats In Focus series, I take a closer look at the growth prospects and competitive advantages of Sigma-Aldrich (SIAL, Financial). Sigma-Aldrich is a diversified chemical manufacturer. The company makes biochemical, organic chemical, chromatography products, and diagnostic products. Sigma-Aldrich has increased its dividend payments for 39 consecutive years. The company has a market cap of about $16 billion.

Pharmaceutical giant Merck & Co (MRK, Financial) recently announced plans to acquire Sigma-Aldrich for $140 per share. The deal is expected to close in mid 2015. Sigma-Aldrich’s share price jumped significantly on the news and currently trades at a price of about $135, just below the acquisition price. This article will cover the business prospects of Sigma-Aldrich as a stand-alone business to give investors an idea of what makes the company so valuable for Merck & Co.

Business overview

Sigma Aldrich operates in 3 business segments. Each segment is listed below along with the percentage of total revenue each segment has generated for the overall business through the first 9 months of the company’s fiscal 2014.

  • Research: 51% of total revenue
  • Applied: 25% of total revenue
  • SAFC Commercial: 24% of total revenue

The research segment is the company’s largest. Sigma-Aldrich’s research segment supports research performed by customers in government, academia, hospital laboratories, and the biotech and pharmaceutical industry. The segment divides its operations into 3 divisions: academia and government (50% of segment sales), pharma (25% of segment sales), and dealers (25% of segment sales). The research segment works with its various customers to provide solutions such as drug discovery and development.

The applied segment provides customized solutions and critical components to diagnostic companies and testing laboratories. The diagnostic segment is a pioneer in using proteins to test for various diseases, including cancer. The applied segment is Sigma-Aldrich’s fastest growing, with organic sales growing 10% for the company’s most recent quarter versus the year ago period.

Sigma-Aldrich’s SAFC Commercial segment operates in 3 distinct subdivisions: life science products (65% of segment sales), life science services (20% of segment sales) and hi-tech electronics (15% of segment sales). The life science product division provides critical components to the biopharma industry including cell culture media. The life science services segment provides consulting and related services for viral testing and viral clearance laboratories. The hi-tech electronics segment provides precursor chemicals for advanced semiconductors to the semiconductor industry.

Competitive advantage

Sigma-Aldrich’s fist competitive advantage comes from its global scale and proficiency at dealing with regulatory agencies. The company sells 230,000 different products, services and solutions in 160 countries around the world. Sigma-Aldrich works with about 1,500 regulatory agencies throughout the world and has 40 manufacturing sites around the world. The company has access to the most important government, academic and corporate health care and industrial clients in the world. Sigma-Aldrich’s proficiency and knowledge in dealing with regulatory agencies as well as manufacturing gives it a strong competitive advantage. A startup competitor would take decades of continuous growth and experience combined with significant capital outlays to reach the size, scale and proficiency of Sigma-Aldrich.

The company’s second competitive advantage comes from its life-science industry leading e-commerce site. The company’s e-commerce site generates about $1 billion per year in sales and receives 70 million visits and 2.7 million orders per year. A competitor would find it difficult to dethrone Sigma-Aldrich’s industry-leading e-commerce site as the company is already well established online and has an incumbent advantage over new entrants.

Growth prospects

Sigma-Aldrich has managed to grow revenue per share at about 7% a year over the last decade. The company has been a net share repurchase, reducing share count by about 1.3% a year over the last decade. Sigma-Aldrich’s applied segment is growing organic revenue quickly, with 10% organic revenue growth in its most recent quarter. The company is benefiting from the biopharma boom as it provides necessary products and components for the industry.

Sigma-Aldrich’s strong competitive advantage and global position give it solid growth prospects going forward. The company is benefiting from increased spending in developing markets on health care research and development. In 2013, 57% of revenue came outside the U.S. Going forward, I expect Sigma-Aldrich to grow at least as fast as it has over the last decade. The company will continue to benefit from favorable macroeconomic trends pushing further research and development expenditure in both developed and emerging markets. Sigma-Aldrich’s divers product and service portfolio combined with its regulatory know-how and global manufacturing position it well for future growth.

Recession performance

Sigma-Aldrich’s operations showed no signs of slowing down during the Great Recession of 2007-2009. EPS increased each year through the Great Recession. In fact, EPS have grown every year since 2002 for Sigma-Aldrich. The company’s EPS for 2007 through 2009 are shown below to show how little the global economic downturn affected the company:

  • 2007 EPS of $2.34
  • 2008 EPS of $2.65
  • 2009 EPS of $2.80

The reason Sigma-Aldrich performs so well during recessions is because it generates its revenues from customers whose cash flows are largely independent of the overall economic climate. People simply don’t cut back on health care during recessions because they cannot. As a result, companies that work closely with health care providers tend to prosper throughout the economic cycle.

Final thoughts

Sigma-Aldrich is a high-quality business with two strong competitive advantages. The Merck acquisition will likely go through in mid-2015. This means shareholders of the company can expect a return of about 4% (including dividends) through mid-2015 based on the current share price and the $140 per share acquisition price. If the deal falls through, Sigma-Aldrich’s share price may tumble back to the pre-acquisition range of about $100. If it does, the company will likely be a Top 20 stock based on the 8 Rules of Dividend Investing due to its solid growth rate, low price standard deviation of about 26%, and extremely low payout ratio under 30%. It is unlikely the deal falls through however, as a result, shares of Sigma-Aldrich should appeal to investors looking for merger-arbitrage exposure.