Smith & Nephew: my top Woodford stock after dividend hike

Smith & Nephew’s decision to raise its dividend by 50% is great news for investors and its shares are top of the FTSE 100 with a 3.5% gain.

The medical technology company’s payouts looked increasingly mean given the large amounts of cash it generates and that it had paid off virtually all its debts. A dividend cover of over four times and a yield of less than 2% showed S&N apparently strangely unresponsive to the huge demand from investors for income.

Well now it has responded, increasing the US dollar-based interim dividend to 9.9 cents, from 6.6 cents last year, with the aim to raise the final dividend from 10.8 cents to 16.2 cents.

I’m pleased because I bought nearly £1,000 of shares for the Citywire Top Stocks portfolio on 11 June. Smith & Nephew entered Top Stocks in May on the back of its top 10 position in the Artemis UK Special Situations fund run by Derek Stuart.

My portfolio: Click to enlarge

Stuart wasn’t the only manager taking a big interest. At around the same time Neil Woodford revealed he had recycled some of the money from selling Tesco (TSCO.L) from the Edinburgh investment trust he manages into Smith & Nephew earlier in the year.

Alex Savvides, manager of JOHCM UK Dynamic , and  Stephen Peak, manager of Henderson UK Alpha , also discussed the stock, which was a top holding in their funds too, in interviews with Citywire.

Given the share price seemed broadly at the same level at which Woodford had bought I thought I’d buy some too. I’m glad I did as the shares have rallied over 10% since then. (Unilever (ULVR.L) which I bought on the same day has risen a similar amount, and my overall deficit on my Top Stocks investments has improved to -3.5%. I’m really hoping Mario Draghi doesn’t upset markets too much today!)

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The decision to hike the dividend shows things are really happening at Smith & Nephew (SN.L) and follows a period of change for the £6 billion company. Chief executive Olivier Bohuon (pictured) took over around 15 months ago and soon after outlined five strategic priorities. These included sensible things like reinforcing its position in mature markets and growing in emerging markets, pledges to innovate and to simplify the group and also to make acquisitions to boost organic growth.

Today’s half-year results show some benefits from this focus. Underlying second quarter profits were in line with expectations, rising 6% to $234 million and taking the total for the six months to $486 million up from $477 million a year ago. Half-year adjusted earnings per share rose 3% to 37.6 cents. This is a good performance given the challenges austerity-driven spending cuts are posing all healthcare related businesses in Europe.

The Advanced Surgical Devices division, which is being formed from the merger of its knee and hip implant businesses, grew revenues by 2% in the second quarter, despite the problems in Europe and the medical controversy over metal-on-metal replacement hips. Its sports medicine joint repair business did particularly well with revenues up 10%.

The smaller Advanced Wound Management division beat the wider market with 4% growth in revenues and it is here that analysts think that Smith & Nephew may make an acquisition.

Bohuon insisted that the dividend increase would not impinge on his warchest. ‘It doesn't change at all – and I want to insist on this – our ability to make acquisitions and our focus on acquisitions,’ he told reporters. He added: ‘It can go from a bolt-on acquisition at $10 million to something much more significant, depending on what we find on the market. We have worked very hard this quarter to investigate different areas.’

Bohuon pointed out that the company paid $150 million in dividends last year so that a 50% increase really wasn’t a big deal in circumstances.

With the shares trading at around 13 times forecast earnings and the business operating well, showing ambition and promising a progressive dividend, Smith & Nephew looks like a stock to hang on to. Panmure Gordon and Seymour Pierce have both maintained their 'buy' stances with respective price targets of 680p and 760p, which provides further ecnouragement. The shares are up 23.5p to 683p today and have risen 8.5% year to date.

What the fund managers said and Diary of a Top Stocker:

Here are the articles in which the fund managers mentioned in this article talked about Smith & Nephew.

• Neil Woodford: 5 stocks I bought with Tesco money;
• Derek Stuart: my pick of battered stocks;
• Interview with Alex Savvides of JO Hambro Capital.

And here are some of my previous entries in Diary of a Top Stocker, describing my attempt to invest £10,000 in Citywire Top Stocks.

• Can I invest my way out of trouble?;
• Pouncing on battered Weir;
• What should I do with shares in Imagination Technology?;
• Buying at the top of the market;
• 5 quality blue chips I've got my eye on.