(Published Nov. 2 by Bob Ciura)
Becton, Dickinson and Co. (BDX, Financial) is a medical supply company with an operating history of 118 years.
Becton, Dickinson offers a wide range of products. Its products are used for a variety of purposes, some of which include diagnostics, infection prevention, surgical equipment and diabetes management. Over the past 118 years, it has consistently innovated to produce industry-leading products.
Becton, Dickinson now has more than 40,000 associates and operates in more than 190 countries across the globe.
The company has paid increasing dividends for 44 consecutive years. This makes Becton, Dickinson one of only 50 Dividend Aristocrats – stocks with 25-plus years of consecutive dividend increases. You can see a full list of the Dividend Aristocrats here.
Keep reading this article to learn more about the investment prospects of Becton, Dickinson.
Business overview
The company is organized into two core segments, each of which has a large product portfolio:
BD Medical (69.4% of sales)
- Diabetes care.
- Medication management solutions.
- Medication and procedural solutions.
- Pharmaceutical systems.
BD Life Sciences (30.6% of sales)
- Biosciences.
- Diagnostic systems.
- Preanalytical systems.
Every individual product line plays an important role within Becton, Dickinson’s two core segments. Several of them generate $1 billion or more of revenue each year.
Source: 2015 Annual Report, page 7
The company restructured its product portfolio last year with the $12 billion acquisition of CareFusion. The takeover significantly increased Becton, Dickinson’s size and scope in the fields of medication management and health care safety solutions. The acquisition doubled the size of Becton, Dickinson’s Medical segment.
This has helped the company continue to grow this year, even in a difficult business climate. Despite the pressure of the strong U.S. dollar, Becton, Dickinson increased revenue by 28% through the first three quarters of 2016.
Becton, Dickinson has also realized significant cost synergies from the merger. It acquired a company with similar manufacturing and distribution systems, which allowed it to cut duplicated costs. As a result, the company’s earnings per share rose 34% over the first nine months of 2016, adjusting for currency.
Growth prospects
Becton, Dickinson has appealing growth prospects. The company stands to benefit from two key growth catalysts:
- The aging U.S. population.
- International growth.
Health care spending is growing at a faster rate than GDP in developed markets like the U.S. The reason is that aging populations create higher demand for health care.
The other catalyst for Becton, Dickinson is international growth, particularly in emerging markets like China. Emerging markets have large populations and rising standards of living. Their economic growth is much higher than that in developed markets.
To capitalize on this, Becton, Dickinson is building its international presence, particularly in China.
Source: 2016 Third-Quarter Earnings Presentation, page 9
Approximately 15% of Becton, Dickinson’s total revenue comes from emerging markets. This allocation should only rise going forward. Becton, Dickinson’s emerging market business is growing at a faster rate than its developed markets segment.
As a result of its growth catalysts, Becton, Dickinson should see strong growth revenue and earnings per share growth rates.
Source: 2016 Third-Quarter Earnings Presentation, page 18
Becton, Dickinson’s growth prospects are made possible thanks to its product innovation, which is one of its distinct competitive advantages.
Competitive advantages and recession performance
Becton, Dickinson’s competitive advantage comes from its global scale, high product quality and product innovation.
The barriers to entry in the medical supply industry are high, which prevents new competitors from entering the market and claiming share. That is because it is costly to finance the significant research and development necessary to compete effectively.
In addition, Becton, Dickinson prides itself on its innovation. The company invests heavily in R&D, which is crucial for a health care company. For example, Becton, Dickinson intends to increase R&D spending by 6.5% in 2016.
Its R&D expense pays off, as Becton, Dickinson has a high-quality brand that commands significant pricing power. This allows the company to generate high profit margins. Over time, it can expand margins to increase profitability.
Source: 2016 Third-Quarter Earnings Presentation, page 12
Through the first three quarters of the year, Becton, Dickinson expanded operating margin by 280 basis points.
Becton, Dickinson performed incredibly well during the 2007-2009 recession. In fact, the company increased earnings per share each year of the Great Recession. That is an accomplishment that few companies can claim for themselves.
From 2007-2009, Becton, Dickinson grew earnings per share by 29%.
- 2007 earnings per share of $3.84.
- 2008 earnings per share of $4.46.
- 2009 earnings per share of $4.95.
Becton, Dickinson performed so well because of its recession-resistant business model. Health care supplies are required to treat patients, regardless of the condition of the economy. Health care providers need to purchase supplies, and patients cannot do without necessary health care procedures.
As a result, Becton, Dickinson is heavily insulated against economic downturns. The company is one of the 10 most recession-resistant Dividend Aristocrats.
Valuation and expected total return
Becton, Dickinson stock has an adjusted price-earnings (P/E) ratio of 19.9. This is below the Standard & Poor's 500 average P/E ratio of 24.3. It’s important to use adjusted earnings rather than GAAP earnings for Becton, Dickinson (and many other health care stocks). Adjusted earnings more accurately reflect underlying earnings power.
Becton, Dickinson definitely qualifies as a premium company. It operates in a growth industry with a highly profitable business model and excellent brand strength. The company appears to be somewhat undervalued relative to the market at current prices.
Even if one were to assume no expansion in the P/E ratio from here, investors can still earn solid returns. Going forward, investor returns will be comprised of earnings growth and dividends. A reasonable scenario in the future is as follows:
- 8% to 10% earnings growth.
- 1.6% dividend yield.
- 9.6% to 11.6% total returns.
Earnings growth could even exceed this assumption. Over the past 10 years, Becton, Dickinson grew earnings by 8.1% compounded annually. It is important to note that this time period included the Great Recession.
In a slow-growth economic climate, the company could easily see double-digit annual earnings per share growth. For example, analysts on average expect Becton, Dickinson to increase earnings per share by 19% in 2016.
Final thoughts
Becton, Dickinson has a below-average dividend yield. Its 1.6% dividend yield falls below the 2% average dividend yield in the S&P 500.
As a result, Becton, Dickinson stock may not be appealing for investors who desire lots of income right now. But it is a much more attractive stock pick for dividend growth investors. The company offers above average total return potential.
Becton, Dickinson’s combination of a reasonable valuation, above average total return potential, a low payout ratio of around 30% and low stock price volatility due to its consistent results give it a top 30 rank using The 8 Rules of Dividend Investing.
Disclosure: I am not long any of the stocks mentioned in this article.
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