Income investors have likely become familiar with stocks known as the Dividend Aristocrats and Dividend Kings, which represent stocks with 25+ and 50+ years of dividend increases, respectively. But there are plenty of quality stocks that aren’t included on these lists.

For example, the Dividend Achievers list covers those stocks with at least 10 consecutive years of dividend growth and makes for an excellent place to find high-quality dividend earners. Perrigo (NYSE:PRGO) is an under-the-radar healthcare company that has increased its dividend for nearly 20 consecutive years, and PRGO stock is significantly undervalued today.

Business Overview for Perrigo

Since its founding in 1887, Perrigo has transformed from a general store to a leading distributor of over-the-counter consumer and pharmaceutical products. The company is composed of two business segments: Consumer Self-Care Americas, which sells consumer healthcare products in the U.S., Canada and Mexico; and Consumer Self-Care International, which sells branded consumer products in Europe, Australia and Israel. Perrigo receives about 70% of its revenue from the U.S.

Healthcare companies tend to hold up very well during recessionary times, as consumers still need these products. Unlike most, Perrigo navigated the last recession very well as earnings-per-share increased more than 120% from 2007 through 2009.

In fact, from 2006 through 2015 earnings-per-share grew at a compound annual growth rate of almost 25%. This growth is even more impressive when you realize the share count expanded by 57% over the same period, as Perrigo issued shares to make acquisitions. However, these acquisitions eventually took a negative toll on the company due to elevated debt levels.

Looking At the Acquisitions

One acquisition in particular that proved problematic was the $7 billion purchase of biotech giant Elan in 2013. Initially, this deal was seen as positive, as it gave Perrigo more of a presence in the pharmaceutical industry. But as time went on, drug prices began to fall.

Making matters worse was that the company’s long-term debt increased by more than a factor of five from 2011 through 2015. Following 2015, earnings-per-share declined five straight years from a high of $7.23 in 2015 to $4.02 in 2020.

However, Perrigo has worked to improve its balance sheet. At the end of 2020, the company had total assets of $11.5 billion, current assets of $3.1 billion and cash and equivalents of $641 million against total liabilities of $5.8 billion and current liabilities of $1.4 billion. Total debt has declined from a high of more than $5 billion in 2015 to $3.6 billion last year. Just $38 million of debt is due within the next year and only $1.7 billion matures within the next five years.

The company’s business results have also improved. Revenues last year grew 5% last year to more than $5 billion, a figure not seen since 2016. Earnings-per-share stabilized, with results only 1 cent below 2019 levels. Perrigo saw year-over-year growth in three out of four quarters last year, as well as the Covid-19 pandemic tailwind.

The company announced on March 1 that it would be selling its generic prescription drug business. Going forward, Perrigo should benefit from its increased focus on its consumer products business, which now contributes nearly 80% of total revenues.

Perrigo expects adjusted earnings-per-share to grow 7% in 2021. While the pandemic helped last year, guidance shows that leadership expects it to transition from stabilization to growth this year. Due to the company’s increased focus on consumer healthcare products, which tend to be more consistent but at a lower margin, we forecast that Perrigo can grow earnings at a rate of 5% annually through 2026 from a base of $4.31.

Dividend Stock Analysis and Potential Returns

Despite the difficult business performance over the last half-decade, Perrigo has still raised its dividend. The company has now increased its dividend for 19 consecutive years after announcing a 6.7% raise for the March 30 payment date.

The annualized dividend of $0.96 results in an expected payout ratio of 22% for the year using our earnings-per-share estimates. This is a very low payout ratio that leaves plenty of room for continued dividend increases. Given that the company raised its dividend with a CAGR of 9.1% over the last five years, it is impressive that the payout ratio has never reached a point where a dividend cut appeared imminent.

Shares of Perrigo yield 2.3% at the moment, which compares favorably to both the stock’s average yield of 0.7% since 2011 and to the average yield of 1.4% for the S&P 500 index. Perrigo’s declining stock price, in conjunction with its annual dividend increases, has created an appealing yield for income investors.

Perrigo also appears to be trading with very reasonable valuations, including sales and earnings-per-share. The company has a market capitalization of just $5.6 billion, while the company generated revenue of just over $5 billion in 2020. Moreover, Perrigo has a price-to-earnings ratio of around 9.6.

Shares have traded hands with a price-to-earnings ratio of almost 19 over the last decade. Given the variance in its financial performance over this period of time, we believe a price-to-earnings ratio of 15 is a reasonable estimate of fair value for PRGO stock. Based on this estimate, an expanding valuation multiple could add 9.3% to annual returns.

Therefore, total returns would consist of the following:

• 5% earnings growth;
• 3% dividend yield; and
• 3% multiple expansion.

We expect total returns for Perrigo could be 16% to 17% annually over the next five years. This is an attractive potential rate of return.

Final Thoughts

Perrigo has struggled through much of the past few years, largely due to badly timed acquisitions. This left its business poorly positioned while simultaneously placing the company under a mountain of debt.

Since then, Perrigo has reduced its debt obligations and maturities are more spread out. That should provide the company breathing room on this front.  While it pays down debt, its business results have also improved. It expects to grow its bottom line in 2021 for the first time in several years.

The market remains skeptical of this dividend stock. Shares continue to trade with a multiple that is almost half of the decade-long average.

This presents investors with a longer-term horizon to acquire shares of a much-better-positioned company at a low valuation. Investors purchasing Perrigo today could see nearly 17% in annual returns over the next five years. Perrigo receives a “buy” rating as a result.

On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article.

Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.