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ResMed Initiates Dividend

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Consistent performance through the past several quarter prompted the board of directors of ResMed Inc. (RMD), a major provider of medical equipment for the treatment of sleeps disordered breathing to initiate a quarterly cash dividend of 17 cents per share. The dividend will be paid from the first quarter of fiscal 2013 that will commence on July 1, 2012. The holders of Australian Chess Depositary Instruments (CDIs) will get a comparable amount in Australian dollar (AUD), based on the exchange rate on the record date reflecting the 10:1 ratio for CDIs.

This dividend represents a payout ratio of approximately 38% in the first quarter of fiscal 2013, based on the first quarter’s expected earnings. We also expect a dividend yield of 2.15% assuming the dividend payment to be 17 cents in each of the four quarters of fiscal 2013.

However, despite the announcement of a dividend initiation, there was negligible movement in the company’s share prices. The share price closed at $32.10 on Thursday on the New York Stock Exchange, down 3.3% from Wednesday’s close. We believe the rate of dividend was a little lower than market expectation that led to drop in share prices reflecting the negative sentiments of the investors.

However, we believe the cash position of ResMed is strong enough to support the dividend payment for the next several quarters. The company’s operating cash flow stood at $86 million as of the third quarter of fiscal 2012 and it had cash and cash equivalents of $776.1 million in the quarter compared with $735.3 million at the end of fiscal 2011.

We are on a whole, encouraged by ResMed’s initiative to return more value to its shareholders apart from share repurchase. For quite a long time, the company utilized its additional cash to repurchase shares through buyback programs. The company repurchased 2.3 million shares for $67 million (10.8 million shares for $302.2 million in the year-to-date) in the last reported quarter and was left with the authorization to repurchase 11.6 million shares. We expect the same to continue along with the introduction of dividend.

Based on a favorable product mix and vastly under-penetrated and growing sleep-disorder breathing market, ResMed reported 18% year over year increase in revenues in Americas while the same from outside Americas increased 4% (7% at CER) in the third quarter of fiscal 2012. Strong double-digit domestic flow generator sales (at 14%), particularly the S9 line of flow generators, coupled with the roll out of the final products on this platform also contributed to the growth.

ResMed is working on a continuous basis to expand its international operations. The company has teamed up with CareFusion (CFN) in a 5-year exclusive distribution agreement, providing CareFusion the exclusive right to distribute the ResMed Stellar 100 and 150 non-invasive ventilators and their related accessories into the US institutional healthcare market.

ResMed currently retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating. Also, we have a long-term ‘Outperform’ recommendation on the stock.

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