Sigma Pharmaceutical Limited's (ASX: SIP) half year profit figures that were released this morning didn't give investors anything to get too excited about, but the result did hint at the stock becoming one of the best yield plays in the sector.
That should be enough to prick the ears of most investors given the prospect of another interest rate cut in Australia after New Zealand cut its interest rate for the third time this year.
The pharmaceutical goods supplier and retailer is well positioned to pay a dividend of 4.5 cents a share, if not more, for the current financial year. This would imply a yield of 8.5% if franking credits are included.
That may sound unsustainably high as the payout represents 85% of the group's consensus net profit for 2015-16, but Sigma should have little trouble meeting this target despite an expected increase in capital expenditure over the next two years.
For one, Sigma is probably going to stop its on-market share buyback. It is putting the buyback on review after it purchased around 10% of its equity.
Secondly, earnings growth for the year ending January 2016 is expected to match that of the previous financial year even though its half year statutory net profit tumbled 15.7% to $18.9 million.
The drop in interim earnings is due to a quirk in the accounting standards as Sigma had to write-off $7.8 million from its bottom line to account for the better than expected performance of a number of acquisitions it made, including CHS, DDS, Pharmasave and Chemist King.
These acquisitions are delivering above the expected $8-$10 million earnings before interest, tax, depreciation and amortisation (EBITDA).
Discounting the accounting treatment, Sigma delivered a 23.3% increase in underlying interim net profit of $18.9 million.
Consensus is tipping a 7% increase in sales to $3.36 billion and a 9% increase in earnings per share to 5.3 cents.
This single-digit growth is expected to continue into 2016-17, which should mean that Sigma will be able to at least maintain its high yield.
It is also pleasing to see the group weaning itself off products that come under the Public Benefit Scheme (PBS) as government rebates for these drugs are likely to be cut in this age of austerity. Non-PBS sales now represent 43% of total revenue compared with 40% for the same period last year.
The stock also looks reasonably priced as it is trading on a 2016-17 price-earnings multiple of 13.5x. While its share price may not appreciate materially from here, I believe the sustainable high yield will keep Sigma well supported in this increasingly volatile trading environment.
Those looking for bigger capital appreciation upside in the healthcare sector should look at hospital operator Ramsay Health Care Limited (ASX: RHC) for its robust margins and profit outlook, or blood plasma company CSL Limited (ASX: CSL) for its relatively defensive earnings and potential upside from new drugs.
