A Look at Baxter International’s Capital Allocation Strategy




After its spin-off of Baxalta in July 2015, Baxter International (BAX) restructured its operations, transforming into a leaner, more efficient organization with a focus on core capabilities. Following the spin-off, the company targeted a steady net-debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio of ~2x. Currently, the ratio stands at ~1x.

As discussed in the previous article, Baxter International registered free cash flow of ~$933 million during the first nine months of fiscal 2017, representing an increase of ~$514 million YoY (year-over-year). The company’s significant cash holdings could be used to create shareholder value.

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Baxter International’s capital allocation strategy

Baxter’s capital allocation strategy involves prioritizing reinvestments in the company. Small tuck-in acquisitions and share buybacks are its preferred means of cash allocation. In 3Q17, the company bought shares worth $180 million in a selective share buyback.

According to Baxter International, as large acquisitions generate marginal returns on invested capital and are difficult to combine, the company prefers “molecule purchasing.” Related initiatives include tuck-ins and divestitures, which are expected to boost the company’s long-term growth. The company is seeking these opportunities outside the United States to expand its geographic presence.

The company has also been paying dividends to shareholders for the last few years. On January 2, 2018, Baxter International paid a quarterly dividend of $0.16 per share to shareholders on record as of December 1, 2017. The dividend was ~23% higher than the dividend of $0.13 per share the company paid in fiscal 3Q16.

On January 4, 2018, peers Zimmer Biomet Holdings (ZBH), Stryker (SYK), and Abbott Laboratories (ABT) had dividend yields of 0.77%, 1.2%, and 1.9%, respectively. The iShares Edge MSCI Min Vol USA ETF (USMV) has a ~0.69% exposure to BAX. Next, we’ll take a look at Baxter International’s 4Q17 performance expectations.


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