Friday, March 1, 2013

Nu Skin Enterprises (NUS) Dividend Stock Analysis

Nu Skin Enterprises, Inc. (NUS) develops and distributes anti-aging personal care products and nutritional supplements worldwide. This dividend achiever has paid dividends since 2001, and has increased dividends for 13 years in a row.

The company’s last dividend increase was in February 2013 when the Board of Directors approved a 50% increase in the quarterly distribution to 30 cents /share. The company’s peer group includes Avon Products (AVP), Estee Lauder (EL) and Revlon (REV).

Over the past decade this dividend growth stock has delivered an annualized total return of 14.40% to its shareholders.

The company has managed to deliver an impressive 17.10% average increase in annual EPS since 2003. Analysts expect Nu Skin Enterprises to earn $3.99 per share in 2013 and $4.50 per share in 2014. In comparison, the company earned $3.52/share in 2012. Over the next five years, analysts expect EPS to rise by 11.40%/annum.

The company’s growth could come from introducing new products, which its army of independent distributors would sell to clients. Another source of growth could include emerging markets, such as Greater China, where revenues have doubled since 2009. The company is a multi-level marketing organization, and its products are sold through independent distributors. One such company, Herbalife (HLF) has been in the spotlight a lot recently, as one activist investor claimed it is a pyramid scheme. This has made other similar companies guilty by association. In general, there is nothing wrong with a company selling products to customers through independent, commission based dealers as long as revenues are indeed derived from product sales.

The one factor that is making me a little uneasy about the company is the fact that it spent less than 1% of its sales on research & development. I am also not certain if its products really work or not. If they do not work, then repeat sales from customers would be difficult to achieve, and the only way to grow would be through constantly having to find new clients and selling to them. If the products do not really achieve their desired purpose, then the only competitive advantage that the company has is its network of independent distributors

Another factor that is making me a little uneasy is this quote from the 2011 annual report “We
include preferred customers who have purchased products during the previous three months in our “active distributor” numbers.” There should be a very big distinction between customers and distributors. This sentence makes me wonder how many of the new distributors, who are referred to by existing independent sales people, end up just closing shop. My skepticism could also be fueled by an experience when someone close I knew purchased cosmetics products from a direct re-seller from another company, and they were not something that would have been purchased again. In fact, according to MLM Myths website, multi-level marketing companies have a very high turnover rate in their independent sales forces.  This could be due to the fact that new sales are mostly coming from newly recruited distributors, rather than from repeat customer purchases.

The company generates a very high return on equity, which has been on the rise since 2006. I generally want to see at least a stable return on equity over time. I use this indicator to assess whether management is able to put extra capital to work at sufficient returns.

The annual dividend payment in US dollars has increased by 12.80% per year over the past decade, which is lower than the growth in EPS.

A 13% growth in distributions translates into the dividend payment doubling almost every five and a half years on average. If we look at historical data, going as far back as 2001, one would notice that the company has indeed managed to double distributions every five and a half years on average.

The dividend payout ratio has remained below 60% over the course of the past decade, with the exception of a brief spike in 2006 – 2007 period. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Nu Skin Enterprises is attractively valued at 10.90 times earnings, yields 3.10% and has a sustainable distribution. While the stock is cheap, and seems to have great growth prospects ahead, the lack of competitive advantages makes me pass it at this time.

Full Disclosure: None

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