Although healthcare has a lot of attributes that would seem to support healthy dividends (protected markets, high margins, excellent cashflow), there's actually only a fairly limited list of quality income names. Once investors have worked past names like Johnson & Johnson (NYSE:JNJ) and Abbott Labs (NYSE:ABT), most investors have to start looking at pharmaceutical names or accept sub-3% yields.

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And there's Meridian Biosciences (Nasdaq:VIVO). An established player in easy-to-use and affordable diagnostic tests, Meridian couples pretty decent growth (and growth potential) with a generous dividend payout. Although this stock is not cheap, it may, nevertheless, appeal to those investors looking for a healthy dividend with some growth upside.

A Decent End to the Fiscal Year
Meridian reported that revenue grew 16% in its fiscal fourth quarter, with its H.pylori testing business growing 10%, the foodborne illness business growing 27% and the Illumigene c.diff business growing 24%. This is a fairly consistent result with prior quarters, but the return of growth in c.diff is very much welcome.

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Profitability was, likewise, quite consistent. While reported gross margin slid a bit, adjusting out a plant consolidation charge would flip that to a half-point improvement. As reported, operating income rose 16% and the company's operating margin was more or less steady. Research and development spending rose 28% from last year, and is around 10% of sales as the company continues to work on new tests to support the Illumigene molecular diagnostics platform. (For more on research and development, see Buying Into Corporate Research & Development (R&D)).

Is C.diff Getting Easier?
There has been some well-merited angst, of late, about Meridian's c.diff platform. This has long been a key business for the company (about 25% of sales) and the quick (15-30 minute), relatively simple and cheap test has been popular with hospitals and labs for a while. Unfortunately, clinicians have told me that the test is not nearly as accurate as the label suggests, and customers had been switching to other rapid EIA tests from Alere (NYSE:ALR) and molecular tests from Cepheid (Nasdaq:CPHD), Becton Dickinson (NYSE:BDX) and Gen-Probe (Nasdaq:GPRO).

Now, it seems like VIVO is regaining lost ground with its own Illumigene MDx platform. The Illumigene test takes longer than the Cepheid test, but its cheaper. Meridian gives away the boxes, and the platform is a good fit for facilities with limited space, money and personnel.


More MDx on the Way
Molecular diagnostics is here to stay, and is one of the few hot areas of med-tech, as it offers improved accuracy over traditional testing methods. There are plenty of molecular tests out there now, whether from Cepheid, Becton, Gen-Probe or other players like Luminex (Nasdaq:LMNX), and it wouldn't seem to be an obvious market for Meridian. After all, Meridian's bread and butter has been easy-to-use, low-cost (usually less than $25) tests based on more traditional chemistry.

That said, Illumigene seems to allow Meridian to stay relevant without compromising its low-cost philosophy. Now, the company is working to expand its test offering, for the system, with upper respiratory and infectious diseases like pneumonia, strep throat and whooping cough on the docket.

Will Food Poisoning Ever Matter ?
I really would like to hope that Meridian's foodborne illness testing business becomes increasingly less necessary, but I'm not that much of an optimist. Food safety is an underappreciated issue in this country, even though every year seems to have reports of tainted tomatoes, peppers, meat or whatnot killing people. Along similar lines, companies like Bio-Rad (NYSE:BIO) and Neogen (Nasdaq:NEOG) should be selling more point-of-production testing equipment, but the reality is that there just aren't the laws or public clamor forcing the issue.

The Bottom Line
There's a lot to like about Meridian. The company has a clear and attractive niche, good margins, and a clear willingness to share profits with shareholders. Unfortunately, cheap diagnostic plays are a rare breed these days, and Meridian is no exception. It's not as expensive as Cepheid, but even stocks like Quidel (Nasdaq:QDEL) and IRIS (Nasdaq:IRIS) have fairly robust valuations today.

Whether or not Meridian is a good takeout candidate is an interesting question, as Gen-Probe apparently couldn't drum up much interest. On its own, Meridian is going to have to grow impressively to justify today's price. Although, I think the company will see enough growth to keep the dividend healthy and live up to today's price, I don't see any real undervaluation here, and that nice dividend yield is not enough enticement for me. (For related reading, see Due Diligence On Dividends.)

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.