Hearing aid and bionic ear implant developer Cochlear Limited (ASX: COH) has recovered strongly in share price, up to about $70 from lows around $55 in February. That's a rise of about 27%, which certainly is higher than the 5.9% gains of the S&P/ASX 200 Index (Index: ^XJO) (ASX: XJO) over the same time.
The company has been trailing down in earnings over the past three years, but I have three reasons why it is beginning to turn around, so it may be good to stick with your shares as this recovery builds momentum.
1) New products in the market
During FY 2014, four products such as its Nucleus 6 sound processor and Baha 4 Attract ear piece were launched. In the first half, sales began to see growth from them, but it was the second half when the full effect of the new product sales was really realised.
2) Earnings recovery seen in full year results and outlook
This month it reported a full year revenue increase of 7%. However, underlying net profit was down 17% to $109.5 million partly because of a patent dispute provision of $15.7 million. The first half is where most of the earnings weakness came from. Yet once necessary regulatory approvals were granted, the new products were launched.
The company's outlook is for further increased sales for the products just launched in FY 2014. They have been released in the company's major markets, so next will be the rollout to the other markets. In addition, other new products will be released in FY 2015, underpinning growth.
3) Strong dividend growth track record
Although in recent years earnings have slipped down, the company has maintained and even raised dividends. In FY 2014, it reported $1.62 per share in full year earnings, yet full year dividends were increased 1% for a total of $2.54 per share.
That's a payout ratio of 155%. You can't expect that to happen every year, but it shows the company wants to reward patient shareholders while revenue and profits recover. Already, second half revenue and net profits are up 28% and 32%, respectively, so we will be looking for further earnings improvement. The dividend yield is currently 3.7% partially franked.
