Shares of Becton, Dickinson and Co. (BDX, Financial) reported earnings results earlier this month that came in above Wall Street analysts’ estimates. Covid-19 remains a tailwind to the company’s business, but the core segments also performed well.
The stock is flat since the last time I discussed this name, but Becton, Dickinson & Co. continues to trade below its intrinsic value based on the GuruFocus Value chart. The company also recently announced a dividend increase that extends its growth streak to 50 years. All things considered, I believe the stock to be significantly undervalued at current levels.
Earnings highlights
Becton, Dickinson & Co. announced earnings results for its fourth quarter and full fiscal year of 2021 on Nov. 4.
For full fiscal year 2021, revenue was up more than 18% to $20.3 billion and adjusted earnings per share surged 28% to $13.08.
For the quarter, revenue grew 7.3% to $5.1 billion, coming in $226 million above what analysts had anticipated. Excluding a currency exchange benefit, revenue grew 5.9% year-over-year. Adjusted earnings per share of $2.59 represented a 7.2% decrease from the prior year, but topped estimates by 14 cents.
Revenue for BD Medical increased 7.7% in the fourth quarter as all units within the segment showed growth. Medication Delivery Solutions were led by catheters and vascular care devices, and Pharmaceutical saw increased demand for pre-fillable syringes. Both were higher by low double-digits.
BD Life Science grew 1.5%. Excluding Covid-19, revenue was up nearly 16%. Demand for testing equipment fell from the prior year, but Integrated Diagnostic Solutions improved 16.2% due to strength in specimen management and microbiology. Bioscience grew 14.6% as lab utilization rates are returning to pre-pandemic levels.
Intervention climbed more than 8%. Surgery was the best performer as a recovery of elective procedures led to a high-teens growth rate. Peripheral Intervention benefited from a higher number of cancer screenings while Urology and Critical Care saw an uptick in new product utilization.
Becton, Dickinson & Co. gave guidance for the new fiscal year as well. The company expects revenue of $19.3 to $19.5 billion for the year, which would be a 5% to 6% improvement for the base business. Adjusted earnings per share are projected to be in a range of $12.30 to $12.50 for fiscal year 2022, which would be a 4% to 6% decrease from the prior fiscal year. At the midpoint, adjusted earnings per share for fiscal year 2022 would be the Becton, Dickinson & Co.'s second best ever performance (after the prior fiscal year).
Takeaways
Covid-19 remains a sizeable portion of Becton, Dickinson & Co.'s business. Related revenues totaled 6.2% of quarterly and 9.7% of fiscal year totals. Backing out the Covid-19 revenues, fourth-quarter revenues grew 11.3% on a reported basis and 9.8% excluding currency exchange. For the fiscal year, base revenues improved 10.5% and 8.1% on a reported and currency neutral basis, respectively.
Looking at these figures, it is clear that Covid-19 was a benefit to the company, but Becton, Dickinson & Co.'s base businesses have performed extremely well. Going back to fiscal year 2019, before Covid-19 impacted results, base revenue was higher by 6%.
Covid-19 testing revenues did fall more than 30% from the prior year, which could be taken as evidence that demand for related products is beginning to weaken. That said, more variants for Covid-19 keep cropping up, so that likely means that demand for testing will remain a factor in the long-run, even if it has its ups and downs.
Even if the company sees lower revenues from Covid-19 testing in the future, it still has plenty of growth catalysts. Becton, Dickinson & Co. spends more than $1 billion, or ~5%, of annual sales, on research and development, and that has allowed the company to grow its patent portfolio to more than 29,000.
Approximately 90% of patients in the U.S. will encounter one of the company’s machines when they go to a hospital. Becton, Dickinson & Co. is very diversified, as it operates in more than 190 countries and receives nearly half of revenues from international markets.
The company is on pace to spin off its diabetes business sometime in the first half of next year, allowing BD to focus on its higher growth segments. At the company’s most recent investors’ day, leadership stated that it expected the Medical segment to grow 5% and both Intervention and Life Sciences to grow by 6% to 7% annually over the next half-decade.
Dividend
Becton, Dickinson & Co. also announced a dividend increase at the time of the earnings report. The company raised its dividend nearly 5% to 87 cents per share, starting with the upcoming Dec. 31, 2021 payment date.
Becton, Dickinson & Co. yields just 1.4% based on the new annualized dividend of $3.48, which is only a bit higher than the average yield for the S&P 500 index. However, the company makes up for the low yield with a fairly high certainty of dividend safety. The projected payout ratio for fiscal year 2022 is just 28% and is below the 10-year average payout ratio of 30%.
As a result of the most recent raise, Becton, Dickinson & Co. now has 50 consecutive years of dividend growth, earning the company the title of Dividend King. There are just over 30 other companies with at least five decades of continuous dividend growth, so this is no small achievement.
Becton, Dickinson & Co. has been able to join this exclusive club of dividend growers because its business is very strong as earnings per share have a compound annual growth rate (CAGR) of more than 10% over the last decade. The dividend has a CAGR of 7% over the last 10 years, so Becton, Dickinson & Co. has been very successful at growing its earnings per share at a higher rate than its dividend. Given these factors, it is likely that BD will continue to raise its dividend for years to come.
Valuation
Besides a safe dividend, Becton, Dickinson & Co. offers a reasonable valuation at the moment. Using last week’s closing price of $245 and the midpoint for earnings per share guidance, Becton, Dickinson & Co. has a forward price-earnings ratio of 19.8. This is nearly in-line with the 10-year average multiple of 19 times earnings.
The GuruFocus Value chart also shows the stock to be trading at a discount to its intrinsic value.
Becton, Dickinson & Co. has a GF Value of $270.66. Based on the most recent closing price, shares have a price-to-GF-Value ratio of 0.91. Reaching the GF Value would result in a 10.5% improvement in the share price before even factoring in the dividend yield. The stock is rated as fairly valued.
Final thoughts
Becton, Dickinson & Co. turned in a solid quarter and a very successful year. Covid-19 was a sizeable contributor to results, but the company’s core segments demonstrated gains in almost every business. The company has a long track record of growing its top and bottom-lines, which enabled it to have five decades of dividend growth. This is a rare feat that reflects Becton, Dickinson & Co.'s strong business model and highlights its current undervaluation.
