The start of 2014 was not that good for shares in Cochlear Limited (ASX: COH) as the stock hit lows of about $52 in February. The company, which is famous for its bionic hearing devices around the world, reported its first-half results of net profit down 73%.
Since then, the stock is up about 20% versus the 4% rise of the S&P ASX 200 Index (ASX: ^XJO). Setbacks in 2011 affected the business until this year, but it looks like things are improving. That can be seen by the share price recovery, but I know of three reasons why shareholders should keep holding onto their shares because bigger gains are possible.
Latest Cochlear devices on the market
Earlier this year the product that had failure problems in 2011 was certified to return to market in Europe after manufacturing issues were solved. Along with that, the company's Nucleus Hybrid device was also approved for sale in the US. With two separate implants on the market, full year revenue is expected to rise about 13% in 2014-2015.
That's good because FY 2014 interim net profit was way down. The stock was punished twice in early and mid-2013 when two earnings downgrades were released. The share price was down from $80 to about $55. Since early May this year, it has recovered to about $62.45, but I think offloading shares now may be premature.
Strong quality company at low prices
Good companies can occasionally have bad half years or years when problems pull down earnings, but in this case it was a temporary problem that allowed long-term investors to buy into a quality stock at more affordable prices.
Cochlear regularly has high net profit margins and return on equity. Its specialised medical products command premium prices and are in high demand, so it has good competitive advantages. The 2011 problem interrupted business and earnings growth, but now it can get back on track with this year's advances.
Dividend history, yield and growth
Another great thing about Cochlear is the past 10-year record of increased dividends every year. Even in 2011 and 2012 when earnings fell due to the defective device issue, dividends rose. Steady shareholders picked up cheaper shares and received higher dividends. It still has an attractive 4.0% yield partially franked. Now may be the time when earnings begin to recover. That could increase the dividend payout more. The company is definitely a good portfolio candidate for the long term.
