It’s the perfect healthcare stock to buy and keep for decades


Ohen you are looking for stocks that will stand the test of time and increase the value of your portfolio for many years to come, it helps to hitch your trailer to companies that serve needs for which there is no substitute.

For example, when someone is in the hospital and needs surgery, there is absolutely nothing that can replace a super clean operating room – and that’s where Steris (NYSE: STE) Between.

Let’s explore what makes this stock so attractive as a long-term hold.

Image source: Getty Images.

Meet the health system cleaners

As a sterilization company, Steris serves healthcare customers, with everyone from biomedical research labs to hospitals and pharmaceutical companies, who demand its sterility products and services.

Whether it’s equipment for aseptic manufacturing, surgical tool sterilization as a service, or simply the sale of alcohol wipes, the company’s customers simply cannot achieve their primary goals without its help. – and Steris has no direct competitors that operate on the same global scale. Think of how little a healthcare system could do without solutions in place for basic things like keeping medical instruments clean and eliminating biohazardous waste from common areas.

Although it is barely profitable, its margin has increased over the past five years, reaching almost 6.5%. Additionally, 80% of Steris’ revenue is recurring through the constant need for the services and consumable goods it sells, and its sales over the past 12 months have reached more than $4.2 billion. Thus, investors can take a measure of confidence in the stability of earnings, which makes quarter-to-quarter changes much less relevant.

As you might have guessed, there is nothing on the horizon that could disrupt its market. While new sterilization technologies may emerge, Steris serves so many niches in medical-grade cleanliness that it’s virtually impossible for a single product to significantly threaten its bottom line. Moreover, as the dominant player in the market and with its $359 million in cash, Steris could probably acquire a very threatening new entrant.

Although there is not necessarily a rapid increase in demand for what it offers, it is likely to benefit from the painstaking growth of the healthcare sector over time. For reference, one of management’s priorities is to continue to sustainably grow revenue up to 9% per year over the long term, with earnings growing at a slightly faster rate all the time.

Over the past decade, this kind of sustainable growth has been one of Steris’ main attractions for investors, as the chart shows.

STE Revenue Table (Quarterly)

STE Revenue Data (Quarterly) by YCharts

As you can see, there’s not much change in revenue or expense as a revenue share from quarter to quarter, although its earnings per share (EPS) is a bit more volatile. . Even the chaos of early 2020 is just a hiccup, which is just one more reason why this is a rock-solid stock.

It will fill your wallet too

Since Steris’ revenues are very stable, it can afford to pay a dividend that currently has a projected yield of 0.7%. Of course, this low return will never make you rich, but the company also has a long history of increasing payouts over time, as the chart shows.

STE Free Cash Flow Statement (Quarterly)

STE Free Cash Flow Data (Quarterly) by YCharts

So if you are willing to hold your shares for a very long time, you will fully benefit from an increasingly larger payout. Management has said it will continue to use the company’s free cash flow (FCF) to keep increasing the dividend, not to mention share buybacks and buying up promising companies.

Given its business model and management’s objectives, it’s pretty safe to say that its dividend isn’t going anywhere anytime soon, and that’s another of the main positives of this stock.

Nothing is perfect

While Steris is a great company due to its recurring revenue and ever-increasing dividend, you should still be aware that it’s not a stock for everyone who might be interested in a stock holding. long term.

Although its return of over 853% over the past 10 years has crushed the market’s total return of around 295%, its low base revenue growth rate means it may not always do so at the future, and I certainly wouldn’t call it a growth stock.

Additionally, if its costs rise and remain consistently high for some reason, perhaps because new competitors begin to challenge its market share, it could put the dividend at risk since its profit margin is perpetually thin.

But if you’re willing to accept that it’s a steady, slow builder of wealth rather than a shooting star, Steris is a great option for anchoring your portfolio value and generating cash at the same time.

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Alex Carchidi has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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