CML HEALTHCARE DIVIDEND AT RISK: RBC

RBC warned this week that one of Canada’s largest operators of diagnostic laboratories could cut its dividend. Douglas Miehm, analyst with RBC Capital Markets, said CML

Healthcare Inc.’ s (CLC/TSX) payout ratio could top 100% in the next two years, meaning the company may have to leverage its balance sheet to keep its dividend at current levels.

“Management believes the payout ratio will now stand at 90%-100% but we expect 95%-105% is more likely in 2012, thereby increasing the risk profile on the dividend,” Mr. Miehm said.

He decreased his price target on the company to $9.50 from $11 and increased his risk profile on the stock to “above average risk.”

CML Healthcare recently posted revenues of $94-million in the second quarter, down 1.4% year-over-year and missing Mr. Miehm’s own estimate $96-million. The company’s earnings per share (16¢) also came in below Mr. Miehm’s estimate (19¢).

Although CML can leverage its balance sheet to keep paying the dividend in the short term, a critical decision will likely have to be made some time this year. CML is expected to announce a new growth strategy in September, but Mr. Miehm does not expect the plan to reveal any major shifts in capital spending.

Instead, he said that the outcome of upcoming negotiations with the Ontario health ministry will be far more crucial to the future of the dividend. CML’s lab services contract with the health ministry will end on March 31, 2013 and negotiations are likely to begin sometime later this year.

“We anticipate a similar agreement to the current deal which provides for 0.5%-1.5% increase in cap revenues,” Mr. Miehm said. “Should the next agreement fall below that level to 0% or worse, the stock would unlikely react favorably as the labs generate the bulk of the cash flow and CML would be hard pressed to maintain the dividend at current levels.” John Shmuel, Financial Post

CML HEALTHCARE CLC/TSX, $8.83, up 3¢