Sunday, August 23, 2009

Oh, No Utah Didn't

On August 4, 2009, Utah Medical Products, Inc. (UTMD) announced that its Board of Directors approved a quarterly cash dividend of twenty-three cents ($.23) per share of common stock payable on October 5, 2009 to shareholders of record at the close of business on September 16, 2009.

But this manufacturer of “disposable and reusable specialty medical devices” with “a particular interest in health care for women and their babies” didn’t stop there. The company also pre-announced its 4th quarter dividend and the intention to pre-pay.


Looking ahead, UTMD expects to pay the following quarterly dividend on December 30, 2009 instead of January 5, 2010, anticipating that 2009 dividends may be taxed at a lower rate than in 2010. The Board of Directors made this exception at the end of 2008, as well.


Higher dividend taxes? You don’t say!

But only rich people get dividends, right? Tell that to your next door neighbor. We are a nation of investors and it is the change in incentives that will really hurt companies, their shareholders, and by extension the entire economy.

In one tiny press release, the fallacy of raising dividend taxes to increase government revenue is revealed. Companies react to negative incentives. Perhaps the best thing President Bush did in office was to place stock repurchases and dividend payments on equal tax footing. This helped remove the incentive of managers to hoard cash and/or spend it on unwise investments. Dividend tax cuts are a real stimulus package!

So it’s welcome back to a world where dividends are disadvantaged and managers have an incentive to hold cash rather than pay it out. Let’s hope UTMD is wrong in their timing (as they were last year).

For Utah the entire debate is probably moot. They seem to always use cash wisely. In an era where dividends are punished, CEO Kevin Cornwell may simply shift the focus toward more share repurchases (if that’s possible). In the 12 months preceding the recent results, UTMD’s shares outstanding fell 7.7% to 3.6 million shares. This is powerful stuff and it is a very long-running trend. In fact, I believe Mr. Cornwell is engineering the slowest “going private” transaction in history.

Not a bad target either. Utah Medical generates $7 to $8 million a year in free cash flow, making it as steady state a company as I’ve seen. Translation: UTMD is boring. I like boring, especially where cash flow is concerned. Adjusted for cash, UTMD trades for between 11 and 13 times free cash flow given its $105 million market value.

For now, UTMD can take a balanced approach towards share buybacks and dividends. And clearly, it can accelerate dividend payments as it sees fit. Each dividend payment amounts to around $800,000 each quarter. With some $15 million in net cash, Utah is perfectly capable of paying 4 or 5 years of dividends upfront if management so chooses.

Rarely do we see such candor from a public company as we did in this press release. It’s even rarer to see one working so diligently on its shareholders’ behalf.

Whatever UTMD decides to do with its dividend rate and schedule, more share repurchases are fine with me. I’m looking forward to my partnership with Mr. Cornwell, because I’m not selling!

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