Investing in hearing device company Cochlear Limited (ASX: COH) for its dividend may seem counterintuitive. That's due to it having a yield of 1.8% versus 4.2% for the S&P/ASX 200 (Index: ^AXJO) (ASX:XJO). However, in my view Cochlear offers a consistent financial outlook and scope to increase dividends over the medium term. Therefore, I feel it has appeal for income-seeking investors.
Financial stability
Cochlear's risk profile is relatively low. This means that its dividend payments should be robust and consistent in comparison to ASX peers. For example, Cochlear has a diverse geographical spread. It generates 43% of its sales from the Americas, 40% from Europe, the Middle East and Africa and the remaining 17% from Asia Pacific. Therefore, should one region endure a challenging period, the other regions can offset this.
The hearing device market has high barriers to entry. This enables Cochlear and its peers to experience relatively low competition. Further, Cochlear has a strong reputation among customers for quality and innovation. This increases customer loyalty which provides more stable and resilient financial performance. Cochlear's customer loyalty was enhanced by the recall of the Nucleus 5 implant in 2011. Although it caused Cochlear's shares to fall in the short run, it showed that the company put customers first.
Cochlear invested $143 million in product innovation in the 2016 financial year. This was an increase of 12% on the prior year. This helps to strengthen its competitive position versus peers and means that its dividend is increasingly robust.
Dividend growth
As well as a resilient dividend, Cochlear's income prospects are enhanced by its earnings growth potential. It is estimated that 600 million people worldwide are affected by hearing loss. However, only 500,000 of them have received a hearing implant. A key reason for this is a lack of affordability in the developing world. This provides growth potential for Cochlear as wealth across the emerging world continues to grow.
Further, Cochlear has improved the efficiency of its global supply network in order to access more customers. It has moved to ownership of the majority of its global distribution network which provides it with greater marketing control. This should enhance customer loyalty and improve Cochlear's earnings growth outlook through a more direct engagement with potential customers.
Cochlear also has scope to leverage its direct-to-patient communications through Cochlear Link. This allows it to cross-sell products and services to existing customers. The potential for upgrades to existing products remains high. For example, the majority of implant recipients are yet to upgrade to the Nucleus 6 sound processor. This should provide a consistent and high rate of earnings growth over the long run.
Outlook
In the next two financial years, Cochlear's dividend payments are forecast to rise at an annualised rate of 16.5%. This puts it on a forward yield using financial year 2018's forecast dividend payments of 2.3%. This is behind the yields on popular income stocks such as Wesfarmers Ltd (ASX: WES), Commonwealth Bank of Australia (ASX: CBA) and Insurance Australia Group Ltd (ASX: IAG). They yield 5.6%, 4.3% and 4.8% respectively. However, in the long run I believe that Cochlear could become an appealing dividend stock due to its mix of dividend stability and dividend growth prospects.
