Royal Phillips: A Shift to Healthcare

03/15/2016 10:14 am EST

Focus: STOCKS

Khoa Nguyen

Investment Analyst, Investing Daily

Growth in two of the world’s largest markets bodes well for this Netherlands-based company which gets roughly 58% of its business from North America and Western Europe, explains Khoa Nguyen in Global Income Edge.

Royal Philips (PHG) is on a roll; in 2015 higher demand from the US and EU drove the firm's 55% profits surge, as revenues rose 2% to $27.2 billion.

This was almost a complete turnaround from 2014, when the company’s bottom line took a hit of 66% after its businesses suffered in China and Russia.

Healthcare is Philips’ largest division, representing about 46% of revenue. The segment offers diagnostic imaging systems and consulting services.

Recently, the company added lucrative long-term agreements with hospitals to provide managed equipment services, which generate stable revenue.

Its consumer lifestyle unit sells electric shavers and toothbrushes as well as TVs and Blu-ray players.

Sales of men’s grooming products in China helped drive the consumer segment last year. The division generated about 23% of its revenue in 2015.

Philips’ lighting division, about 31% of revenue, holds 38% of the global lamp market. Management has long wanted to exit this business to concentrate on its faster-growing healthcare technology business.

Last year the announced a sale of the business to Chinese buyers, but the US Committee on Foreign Investment opposed the deal because of national security concerns.

The division still garnered the interest of other suitors and management expects to divest the lighting division by the second half of this year.

Meanwhile, the future relies on the healthcare boom; as baby boomers age it’s demographically guaranteed that the industry’s growth will continue to accelerate.

Management is committed to dividend stability and targets a payout ratio of 40% to 50% of continuing net income.

During the past 20 years, including the leanest years of the recent global recession and downturn in Europe, the company kept or raised its ample dividend. Yielding 3.5%, Royal Philips is a buy up to $35.

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