Becton and Dickinson: A Long-Term Bet

In this article, let's take a look at Becton, Dickinson & Company (BDX, Financial), a $29.99 billion market cap company, which is a company that provides a wide range of medical devices and diagnostic products used in hospitals, doctors' offices, research labs and other settings.

The company was upgraded by UBS (UBS, Financial) from neutral to buy and also has raised its price target to $167 from $159. The med-company is currently trading at $142.65, which represents a 15% discount. Yahoo! (YHOO, Financial) Finance estimates a one-year target share price at $159.9. In addition, investors will be paid a dividend of $2.40 at the end of the year. It has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 1.64%, which is quite good to protect the purchasing power, especially considering the consistency of track-record dividends payments and favorable expectations regarding dividend growth for the next years. Dividends have been paid since 1926 and during the past 13 years, the highest yield was 2.44%, the lowest was 1.05% and the median was 1.77%.

Jim Simons (Trades, Portfolio) is the largest shareholder of the company with 1.95 million shares valued at $ 280.5 million. But it is fair to say, that the guru has decreased by 27% his position in the stock. On the other hand, Ken Griffin has increased his stake by 164% to $218.2 million.

So, what's going on at Becton, Dickinson & Company that makes this opposite sentiments on two of the best investors in the world?

But before, let´s continue to see the different options taken by the hedge funds. Caxton Associates, Joel Greenblatt (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) initiated new positions in Q1, with 20,000; 19,341 and 1,399 shares, respectively. Further Paul Tudor Jones, Vanguard Health Care Fund and Pioneer Investments have taken long positions.

However, bearish sentiment seems to be more common among the funds since Michael Price and Ray Dalio (Trades, Portfolio) sold out the stock, while Bill Frels (Trades, Portfolio), Jeremy Grantham, Richard Pzena (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Jeff Auxier (Trades, Portfolio) have reduced their positions, as well as First Eagle Investment and Dodge & Cox.

The company continues with a strong focus on emerging markets, especially considering that more than 25% of its business is focused on emerging markets, something that had been planned for 2017 and it was already achieved. One major risk consist on the evolution of commodities prices and it is important to continue having an operational discipline in order to reach positive earnings. In the diagnostics and bioscience segments, it faces competition from strong rivals, such as Abbott (ABT, Financial), which has better marketing or larger R&D budgets.

Now let´s see some numbers, revenues has slightly decreased by 1.02% but earnings per share decreased in the second quarter compared to the same quarter a year ago by 25.5% to $1.08 from $1.45). However, during the past fiscal year, the company reported increased earnings to $6.00 from $4.67 in the previous year. This year, Wall Street expects an improvement in earnings ($7.08 versus $6.00).

The company has provided good returns on capital in the past years. From that point of view, the recent results would not be so bad. I think the firm will maintain its leading positions and return to its historical growth.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

The company has a current ROE of 14.13% which is higher than the industry median and the ones exhibit by CGI Group (GIB, Financial), Amdocs (DOX, Financial) and Teradata (TDC, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels, Igate (IGTE, Financial) could be another option. For investors looking for a greater ROE, Gartner (IT, Financial) has an extremely good ratio. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 26.22x, trading at a discount compared to an average of 30.6x for the industry. To use another metric, its price-to-book ratio of 4.21x indicates a premium versus the industry average of 2.86x while the price-to-sales ratio of 3.34x is above the industry average of 2.69x. The first metric indicate the stock is undervalued, but it is fair to say that the ratio is close to 10-year high of 27.63. However, the P/B Ratio is close to 2-year low of 3.82.

If you had invested $10.000 five years ago, today you could have $22.694, which represents a 17.8% compound annual growth rate (CAGR).

Final comment

Becton Dickinson is the world's largest manufacturer and distributor of medical surgical products and continues to generate steady cash flows. The firm´s capital allocation strategy, demonstrated somewhat in the dividend policy or the cost advantage that arises with the economies of scale, makes me consider this stock for long-term portfolios.

Disclosure: Omar Venerio holds no position in any stocks mentioned