Dividend    Revenue    Profitability    Financial Strength    Investment Case

Royal Philips is a Dutch multinational health technology company. It has more than 80 K employees in more than 100 countries. Company focuses on integrated healthcare by developing innovative solutions to support healthy lifestyle, prevent and treat diseases as well as support home care.

Philips was known in the past as an industrial company, but gradually, through acquisitions, divestments and organic investments turned itself into medical technology company. It has an objective to improve the lives of 2.5 B people per year by 2030, including 400 M in underserved communities. In 2020 it improved lives of 1.75 B people by its products and solutions (according to a methodology, developed by the company).

Philips has three main divisions:

Diagnosis & Treatment businesses – 42% of total sales in 2019. It consists of the following units:

• • • Diagnostic Imaging
    • Image – Guided Therapy
    • Ultrasound
    • Enterprise Diagnostic Informatics

The company has broad portfolio of technologies to be offered to healthcare providers, including Azurion image-guided therapy platform, Vendor Neutral Archive solutions, diagnostic and enterprise viewers and many other products. In 2019 new CT imaging platform was introduced amongst many other innovations. It integrates innovations in imaging, workflow and lifecycle management. It includes DoseWise Portal, a web-based dose monitoring solution.

Connected Care businesses – 28.5% of total sales.

• • • Monitoring & Analytics
    • Sleep & Respiratory Care
    • Therapeutic Care
    • Population Health Management
    • Connected Care Informatics

Philips helps hospitals to manage workflow and lower costs of care. In 2019 Philips introduced IntelliVue MX750 and MX850 bedside patient monitor platforms in Europe. It signed patient monitoring agreements with hospitals in Switzerland, France and Germany to improve workflow and clinical outcomes. In US company launched EarlyVue VS30. It uses automated early warning scoring to collect critical vital signs that allow to identify signs of patient deterioration and timely intervention.

Last year the company announced the intention to acquire BioTelemetry, which should contribute to sales growth and improved EBITA margins. As a developer of cardiac diagnostic and monitoring solutions it would become the part of Connected Care division.

Personal Health businesses – 28% of total sales.

• • • Oral Healthcare
    • Mother & Child Care
    • Personal Care
    • Domestic Appliances

Philips introduced many new products within this division. The examples are the new smart power toothbrush Philips Sonycare ExpertClean, the new smart S7000 Shaver series, the Baby+ app. In the move to become medical technology company, Philips revealed its intention to sell the Domestic Appliances business.

The company delivers products and services both direct to customers and through strategic partnerships with hospitals. Sales channels are well established and represent a mix of a direct sales force, third-party distributors and an online sales portal. In the markets around the world Philips enters into many new long-term customer partnerships to deliver company’s products and services, modernize healthcare systems. That creates the opportunity to increase recurring revenues for services like software licenses.

   Dividends

Dividend has been stable and slightly up in the recent years. However dividend yield of Philips is quite low, only 1.8%. The company’s dividend policy is to pay 40% – 50% of its net profit in the form of dividend. Current payout ratio is 65%.

For 2020 Philips will pay EUR 0.85 per share in dividend with ex-dividend date of May 10, 2021 (dividend would be in cash or share, at shareholder choice).

   Revenue

Since 2015 the company’s revenue growth used to be smooth and consistent, growing at 3% each year on average. In 2020 Philips showed strong resilience despite challenges created by the pandemic. Its comparable sales increased by the same 3% in 2020 to EUR 19.53 B. Connected Care businesses grew 22% year – on – year mainly due to the higher sales of ventilators and monitoring equipment. Diagnosis & Treatment and Personal Health were in slight decline as demand for their products has been softer. Sales declined year – on – year in the first half of the year and then increased in the second half.

In 2021 the company expects to deliver low-single-digit sales growth. Solid growth is expected in Diagnosis/Treatment and Personal Health divisions, up to 5% – 6%. Connected Care sales are expected to be lower than this year as demand in this segment will normalize after the spike last year.

   Profitability

In the last 5 years the company’s earnings grew at 13% yearly. This is significant growth for such large company.

In 2020 adjusted EBITA increased by EUR 7 M due to sales growth and productivity programs and despite the impairment of goodwill charge of EUR 144 M. The adjusted EBITA margin was 13.2% of sales (the highest within divisions was that of Connected Care, 21.5%).  Net income increased by EUR 22 M year – on – year to EUR 1.19 B. The company earned EUR 1.31 per share (in 2019 EPS was EUR 1.27). This is good performance under the current economic conditions.

By 2025 the company expects to improve an adjusted EBITA margin by 60 – 80 basis points each year, reaching high teens from the current 13.2%. The company’s M&A activity – the acquisitions of higher EBITA margins businesses and the sell of lower margin Domestic Appliances – should contribute to the higher profitability than that target. Expected by the management accelerating organic revenue growth and expanding operating margins should result in EPS growth over 10% per annum in the coming years.

   Financial Strength

In 2020 the company’s total debt was higher than in 2019. However the company has more cash in 2020, so its net debt, EUR 3.7 B, is lower than in 2019. Net Debt is not exceeding 1.8x of EBITA and the ratio Net Debt -to- Equity is reasonable at 31%.

In EUR Bln

	2017	2018	2019	2020
Total Debt	4.715	4.821	5.447	6.934
Net Debt	2.776	3.132	4.022	3.708
Equity	12.023	12.117	12.625	11.901
Net Debt/Equity	23%	26%	32%	31%

 

Operating cash flow is 40% of total debt, so debt is well covered by operating cash flow. So overall the debt is not worrisome at the current level.

   Investment case

The company’s share price is up 9% over the last 12 months. On March 16, 2020 its price was EUR 26.92. Since then it is up 72% to EUR 46.3.

We estimate the future share price of Philips in 5 years using historical average P/E ratio. The following assumptions are made to project a stock price.

• We assume that the company’s EPS will grow at the same pace as in the past, 13% per year to EUR 2.41 in the next 5 years.
• Dividend is EUR 0.85 per annum and remains the same in the coming years. So over the next 5 years the total dividend income would be EUR 4.25 per share.
• Future buy backs are not considered.

Multiplying EPS (EUR 1.67) by the average P/E over the last 5 years (24.81), gives us the rough estimate of the stock price in 5 years period:

EUR 2.41 x 24.81 = EUR 59.8

That means the stock price upside potential is 29% from the current price EUR 46.3 if our assumptions come true.

If we add the expected dividend income over the next 5 years (EUR 4.25), the overall return on investment, if the stock is bought today, with dividends not reinvested, could be around 38% over the 5 years period or about 6.7% compound return each year on average.

The risks associated with the company seem to have limited downside. Philips balance sheet is healthy, it enjoys robust sales and profit margin growth on its way to HealthTech leadership and its management team is experienced.

Notes

Source of pictures – the company website unless otherwise stated.

Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation.

The estimates made in the article are for the informational purposes only. They are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article as a starting point for your own due diligence.