Should You Buy Smith & Nephew Today?

LONDON -- Shares in Smith & Nephew have risen steadily in recent months, and were recently up 11% in the year to date.

And I believe that the company's concerted drive toward higher-growth areas and regions should drive the stock higher as earnings and dividends head northwards. Citi have plonked a 797 pence price target on the company's stock, providing chunky upside from current levels.

Transformation plan to deliver excellent rewards
Smith & Nephew is changing its product mix to focus on more lucrative markets, and late last year purchased Healthpoint Biotherapeutics -- a leader in the area of wound management -- as it seeks to address sales difficulties in other areas of the group

The health care giant is also looking to significantly boost its operations in lucrative developing markets to offset weakness in its traditional geographies. The company saw growth of just 1% in the US in quarter four, it announced in February, 2% in its Other Established Markets, and 14% in its Emerging and International Markets division.

The firm announced the acquisition of Brazilian sports medicine, trauma product and orthopaedic reconstruction distributor Pro Cirugia Especializada earlier this month. And the company's healthy balance sheet should support further M&A activity moving forward.

Earnings growth expected to accelerate
Earnings per share are set to rise 3% in 2013 to 51 pence, according to City forecasters, before picking up speed next year to rise 9% to 55 pence.

The company has registered solid annual earnings growth dating back a number of years, and this has helped it to develop a progressive dividend policy -- indeed, the company hiked its final dividend 50% to 16.2 cents (10.5 pence) per share last year, providing a total dividend of 26.1 cents.

And analysts expect this to keep heading higher, with total payouts of 17.6 pence and 19.3 pence predicted for this year and next, respectively. Dividend yields for these years are expected to come in below the current 3.3% FTSE 100 average, at 2.3% and 2.6%, respectively, although rapid growth could see it shoot above the average in coming years. And these payouts are extremely well protected, with coverage of 2.9 times for the next two years well above the widely regarded benchmark of 2 times.

Smith and Nephew currently changes hands on a P/E rating of 14.9 and 13.7 for 2013 and 2014, respectively, providing a discount to a forward earnings multiple of 15 for the entire health care equipment and services sector. In my opinion the likelihood of solid earnings growth and robust dividend increases make the company an excellent pick for investors.

The canny guide for clever investors
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Fool contributor Royston Wild has no position in any stocks mentioned. The Motley Fool owns shares of Smith & Nephew. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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