Dividend Aristocrats In Focus: West Pharmaceutical Services

Updated on March 26th, 2024 by Bob Ciura

We provide an individual analysis of all Dividend Aristocrats each year. The next up in our annual Dividend Aristocrats In Focus series is West Pharmaceutical Services (WST).

The shares have performed extremely well in recent years. This performance was based on strong earnings growth and an expanding valuation multiple.

West Pharmaceutical has also raised its dividend for 30 consecutive years, which means it is on the Dividend Aristocrats list.

We have compiled a list of all 68 Dividend Aristocrats and important financial metrics such as price-to-earnings ratios and dividend yields. You can download the full list by clicking on the link below:

Disclaimer: Sure Dividend is not affiliated with S&P Global in any way. S&P Global owns and maintains The Dividend Aristocrats Index. The information in this article and downloadable spreadsheet is based on Sure Dividend’s own review, summary, and analysis of the S&P 500 Dividend Aristocrats ETF (NOBL) and other sources, and is meant to help individual investors better understand this ETF and the index upon which it is based. None of the information in this article or spreadsheet is official data from S&P Global. Consult S&P Global for official information.

This article will discuss West Pharmaceutical’s business model, growth potential, competitive advantages, and whether we view the stock as a buy right now.

Business Overview

West Pharmaceutical Services is a healthcare company. It manufactures and sells medical packaging and medical components. It is also a contract manufacturer for other MedTech companies. The stock has a market cap of $28 billion.

Products include automatic medication delivery systems and medicine injection solutions, among others.

Sales are mostly generated in the US and the MENA region. This is not a big surprise, as healthcare expenditures on a per-capita basis are among the highest in the US and Europe. High-Value Product Components make up more than half of the company’s sales, while delivery devices contribute a much smaller portion of West Pharmaceutical’s revenue.

West Pharmaceutical Services reported its fourth quarter earnings results on February 15. The company reported that its revenues totaled $730 million, which represents a revenue increase of 3% compared to the prior year’s quarter.

Source: Investor Presentation

West Pharmaceutical Services’ revenues were slightly lower than what the analyst community had expected, like during the previous quarter, when it missed the consensus estimate as well. Revenues were positively impacted by currency rate changes during the period, unlike during the previous quarter when there was no such impact.

West Pharmaceutical Services generated adjusted earnings-per-share of $1.83 during the fourth quarter, which represents an increase of 3% compared to the prior year’s quarter.

West Pharmaceutical Services is forecasting revenues of $3.00 billion to $3.03 billion for fiscal 2024. The company guides for earnings-per-share to fall into a range of $7.50 to $7.75.

Growth Prospects

Healthcare stocks will benefit from ongoing macro trends such as an aging population and increasing numbers of new therapies that seek to treat all kinds of ailments. As a result, West Pharmaceutical Services will likely continue to see ongoing growth from its core businesses, manufacturing, and parts production.

West Pharmaceutical grew its earnings-per-share at an attractive pace of 12% annually between 2009 and 2019. West Pharmaceutical projects a long-term organic sales growth rate in a range of 6% to 8%. Tailwinds for the industry, such as rising healthcare spending, will help West Pharmaceutical in achieving sizeable revenue growth in coming years.

Revenue growth will be one source for higher earnings, but a more favorable product mix will positively impact West Pharmaceutical’s earnings growth as well. The company seeks to increase its revenues in the Proprietary Products segment, which has significantly higher margins than the Contract-Manufactured Products business.

A recently announced buyback program could also help the company in growing its earnings-per-share. We forecast WST to generate 9% annual earnings-per-share growth over the next five years.

Competitive Advantages & Recession Performance

West Pharmaceutical Services is not among the largest healthcare companies in the world. However, its main competitors are not companies such as Johnson & Johnson (JNJ), but rather other parts producers and contract manufacturers.

West Pharmaceutical Services has a range of manufacturing facilities in different countries around the globe. This competitive advantage allows the company to supply directly to the markets where its products are needed while saving on transportation costs.

It also holds several hundred patents that were rewarded over the last couple of years alone, which is the result of its investments in R&D when it comes to proprietary products. In that regard, West Pharmaceutical Services’ investments could pay off in the long run, through an above-average growth rate and a product portfolio that is well-protected against potential new market entrants.

Healthcare is a recession-resilient industry, as demand for medication and treatments does not depend highly on the strength of the economy. During the Great Recession, West Pharmaceutical Services’ earnings-per-share declined by less than 15% peak-to-trough.

This is an attractive performance, both on an absolute basis as well as relative to the big profit declines that were experienced by many other companies with more vulnerable businesses.

WST’s performance during the Great Recession looked like this:

• 2008 earnings-per-share: $1.19
• 2009 earnings-per-share: $1.06 (11% decrease)
• 2010 earnings-per-share: $1.05 (0.9% decrease)
• 2011 earnings-per-share: $1.17 (11% increase)

The company’s resilience during economic downturns makes West Pharmaceutical Services an attractive choice for risk-averse investors, at least on a fundamental basis.

Valuation & Expected Returns

WST has generated excellent returns for shareholders. In the past five years, WST stock produced annualized returns above 30%. This was mostly driven by strong earnings growth and expansion of the P/E multiple in that time frame.

West Pharmaceutical Services currently trades for ~50.8 times 2024’s expected earnings-per-share of $7.63. That is a quite high valuation, both in absolute terms, as well as relative to how the company was valued in the past, looking back a decade and more.

We believe that shares would be fairly valued at 25 times EPS. As a result, we view the stock as significantly overvalued, even when factoring in the forecasted earnings-per-share growth.

A declining P/E multiple from 50.8 to 25 would reduce annual returns by 13.2% per year over the next five years.

With a very low dividend yield of just 0.2%, West Pharmaceutical Services is expected to generate negative annual returns of -4% in the coming five years.

This shows the potential danger of buying stocks with elevated valuation multiples.

Final Thoughts

West Pharmaceutical Services is a strong company on a fundamental basis. The business is recession-resistant, the company benefits from macro growth tailwinds, and the company’s longer-term revenue and earnings growth potential are compelling.

However, the stock’s valuation is very high, and we believe that shares are substantially overvalued at current levels. The very high share price also is the reason why West Pharmaceutical Services’ dividend yield is very low. Despite the fact that the company is a Dividend Aristocrat, we rate the stock a sell at current prices.

If you are interested in finding high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:

The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: