By: Dividend Sensei
One of my favorite things is to find new little known dividend growth stocks with superb business models and great long-term growth potential. Recently I came across LeMaitre Vascular (LMAT), a small cap healthcare company that has carved out a highly profitable and fast growing niche for itself. And unlike many small and fast growing companies, LeMaitre is already paying a very safe, and fast growing dividend.
That has allowed this hidden gem of a company to generate impressive and market beating returns over time:
- LMAT total returns since 2006: 539% (16.7% annualized returns)
- S&P 500 total returns since 2006: 189% (9.3% annualized returns)
Let’s take a look at why LeMaitre is likely to keep growing strongly for many years to come, and thus reward investors with exceptional income growth and market crushing total returns.
LeMaitre Vascular: A Fast Growing Recession Proof Dividend Growth Stock You’ll Want To Own
Founded in 1983 LeMaitre Vascular is a small (434 employees, $104 million in sales, $705 million market cap) company specializing in vascular equipment. Its 14 product lines are exclusively focused on serving the needs of highly skilled and specialized surgeons (heart, neuro, interventional radiologists, ect). The company has staff in 21 countries but sells its products in 80 nations around the globe to over 4,500 hospitals.
LMAT was founded by vascular surgeon George LeMaitre, who remains its CEO and owns 16% of the company. Management in total owns 22% of LMAT meaning they have enormous incentive to maximize growth over time (including dividend growth). That growth is largely from small bolt on acquisitions, 19 in the last 20 years. Acquisitions allow LeMaitre to extend its product lines into more of the $900 million vascular device market. The company also spends about 7.3% of revenue each year on R&D designing new products. The company’s track record on getting new products approved is excellent for this industry (61% with 6% still pending).
Over the past five years the company’s sales and operating profits have grown at annualized rates of 11% and 45%, respectively. Better yet over the long-term management expects to sustain 10% and 20% growth in revenue and earnings.
The key to LeMaitre’s success is its niche focus but wide moat in a recession proof industry. For example during the Great Recession (worst since 1945) sales actually grew 22% and free cash flow per share soared. Surgeons have very strong brand loyalty to devices and surgical systems they train on. They are creatures of habit that are usually price insensitive (they don’t pay for medical products themselves). Thus once LeMaitre wins market share it tends to keep it. And despite its small size, LeMaitre is indeed dominant in this highly fragmented market. For example it has 12% overall market share but is #1 or #2 in 12 of its 14 product lines. This means that LMAT enjoys not just huge growth potential (further industry consolidation) but also incredible pricing power thanks to its very loyal specialized surgeon base. As a result it has some of the best profitability in the industry.
- Gross Margins: 70.3% (industry average 51.5%)
- Operating Margins: 21.0% (industry average 4.4%)
- Net Margins: 32.4% (industry average 4.2%)
- Free Cash Flow Margin: 17.3% (industry average 5%)
- Return On Invested Capital: 18% (5.7%)
In 2017 the company sold its last non vascular business, netting a one time profit of $5.4 million. This inflated its net profits for 2018, which is why management is focused on operating profits. But despite being a very small company LeMaitre manages to generate incredible operating margins of 21%, nearly five times the industry average. More importantly its free cash flow margin of 17.3% helps it sustain its rapid dividend growth. FCF is what’s left over after running a company and investing for future growth. It’s what pays for dividends, buybacks, and repays debt. LeMaitre’s FCF margin is more than triple that of its peers, and its return on invested capital is also three times as great.
ROIC is a good proxy for quality management, and shows you how well management is investing shareholder capital over time. Given that LeMaitre is a founded led company, whose CEO is a vascular surgeon and knows this market like the back of his hand, it’s not surprising he’s able to invest shareholder funds so profitably. That includes making highly disciplined acquisitions that tend to be immensely profitable over time.
And thanks to the fast growth and simultaneous aging of the world’s population (increasing demand for vascular surgery) LeMaitre’s growth runway is not just large, but decades long. As a result over the next 10 years analysts expect the company’s EPS to grow 17.5%. This in turn is likely to continue driving its dividends and shares sharply higher, resulting in some truly impressive market beating returns.