Canada doesn't factor into discussions about healthcare very often outside of its national single-payer system. Nevertheless, investors looking for rich dividend payers in healthcare have to be willing to go the extra mile, and Canada rewards that search. While CML HealthCare (TSE:C.CLC) is not the easiest stock for American investors to buy or follow, the rich 8% yield, strong margins and growth potential make it worth the effort to consider.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Now All About Canada
While CML HealthCare used to own some healthcare imaging centers in the United States, the company jettisoned though in late 2011 and is now solely focused on providing services within Canada. CML is Canada's largest non-hospital provider of imaging services, but two-thirds of the company's revenue comes from its outpatient lab testing business--a business that is similar in many respects to better-known names like Quest Diagnostics (NYSE:DGX) and LabCorp (NYSE:LH).

CML is focused intensely on serving the province of Ontario, which stands to reason since over one-third of Canada's population lives in that province. That said, the company does operate in British Columbia and Alberta, and expansion (presumably through acquisition) into other provinces could be an avenue to future growth.

Reimbursement a Familiar Challenge
While Canada's healthcare system, in many respects, is different than the U.S., there are familiar reimbursement challenges to service providers in the country. The company has had to contend with fee reductions in the past, and the Ontario Health Insurance Plan (OHIP) recently announced further fee reductions.

It's hard to argue that service fee reductions are ever a good thing for the sector, but the reality is that CML is used to the phenomenon. Moreover, the company has maintained solid margins throughout these revisions--with operating margins over 28%, CML compares very well to lab companies like Quest or LabCorp in the U.S.--and it adds even more value to their scale.

SEE: A Look At Corporate Profit Margins

Results Show More Need for More Growth
I don't doubt that there are investors that would be happy to just cash in dividends from CML for years to come and not worry about the growth potential. Nevertheless, the dividend stocks that tend to perform the best are those with dividend growth.

Growth at CML is so-so. Revenue rose 5% this past quarter, and a solid improvement in gross margin (nearly two points) helped offset some increased operating costs and led to a nearly 6% increase in operating income.

As the company already has an extremely high dividend payout (a legacy of its time as a CanRoy), further growth in the dividend has to be supported by underlying business growth. To that end, management may well look to expand its service offerings into additional provinces (including Quebec), or expand its service offerings into women's health and cancer diagnostics.

It will be interesting to see the extent to which CML copies the blueprint of American diagnostics and service firms. LabCorp and Quest have made it a priority to develop or acquire proprietary tests that bring higher reimbursement rates. Likewise, companies like Sequenom (Nasdaq:SQNM), Exact Sciences (Nasdaq:EXAS) and Myriad Genetics (Nasdaq:MYGN) look to build their business from proprietary novel tests. It would be very un-CML-like to start committing resources to risky proprietary test developments, but expansion into more esoteric testing could make sense given the possibility of leveraging it through the existing infrastructure.

The Bottom Line
CML HealthCare is not going to be the most convenient stock for American investors. The company's ADR is quite illiquid and not all brokerages make it easy to buy stocks trading on the Toronto Stock Exchange. Nevertheless, most brokerages can now handle this business and the relative scarcity of high dividend yields in healthcare (at least outside of Big Pharma) may make the additional hassle worthwhile.

With limited organic growth prospects, CML HealthCare is not going to bail out investors who overpay for these shares. Fortunately, very little growth is priced into these shares; even just very low single-digit growth can support a price close to C$11. That's admittedly not a huge amount of capital appreciation potential, the combination of solid total return prospects (capital gains and dividend) and limited competition make this a name worth considering for more conservative investors.

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

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: ALPS Medical Breakthroughs

    Learn more about a unique and innovative exchange-traded fund (ETF) in the biotechnology industry: the ALPS Medical Breakthroughs Fund.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares US Healthcare

    Learn about the iShares U.S. Healthcare exchange-traded fund, which invests in a wide range of health care providers, hospitals and home care facilities.
  3. Mutual Funds & ETFs

    ETF Analysis: BioShares Biotechnology Clinical Trials

    Learn more about the BioShares Biotechnology Clinical Trials Fund, a new and innovative fund focusing on breakthroughs in the health industry.
  4. Mutual Funds & ETFs

    ETF Analysis: First Trust NYSE Arca Biotech

    Learn more about the First Trust NYSE Arca Biotechnology Fund, a highly rated exchange-traded fund in the biotech space.
  5. Mutual Funds & ETFs

    ETF Analysis: Direxion Daily Healthcare Bull 3X

    Learn about the Direxion Daily Healthcare Bull. This is a leveraged ETF that tracks the health care sector, which is a leader in this bull market.
  6. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  7. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  8. Personal Finance

    Protect Your Home From Medicaid Liens

    Plan ahead for long-term care needs to protect your home and your estate.
  9. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  10. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Medical Identity Theft

    Stealing another person’s health insurance information so that ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. Case Management

    Planning, processing and monitoring the healthcare services given ...
  6. Medical Patent

    A legal protection against market competition that a government ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What role does the agency problem play in the modern Health Care industry?

    Agency problems vary from health care system to health care system, and not all economists agree on the degree and desirability ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!