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Ben Reynolds
Ben Reynolds
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Dividend Aristocrats: Medtronic vs. Becton, Dickinson & Company

See the investment prospects of Dividend Aristocrats Medtronic and Becton Dickinson compared in detail

March 19, 2017 | About:

(Published by Bob Ciura on March 17)

The healthcare sector is a great place to look for high-quality dividend stocks. There are many healthcare stocks with long track records of raising dividends each year.

Two such companies are Medtronic (NYSE:MDT) and Becton, Dickinson & Company (NYSE:BDX). They are both Dividend Aristocrats, a group of companies in the S&P 500 that have raised dividends for at least 25 years.

The reason there are so many healthcare stocks on the list, including Medtronic and Becton Dickinson, is because of the strength of their underlying business models.

In many cases, consumers who need healthcare services cannot choose to go without them. Generally, this gives large healthcare companies pricing power and economies of scale.

In turn, this allows many of them to raise their dividends annually. For example, Medtronic and Becton have increased their dividend payouts for 39 and 45 years in a row, respectively.

Business Overview

Winner: Becton

Both companies operate in the medical device industry across a variety of treatment areas.

Medtronic operates four business segments:

  • Cardiac and Vascular (35% of sales).
  • Minimally Invasive Therapies (34% of sales).
  • Restorative Therapies (25% of sales).
  • Diabetes (6% of sales).

These businesses performed well in 2016 and are off to a good start to the current fiscal year. Last year, Medtronic grew adjusted EPS by 2%.

The Cardiac and Vascular Group is the company’s largest segment. It has many sub-divisions, including Cardiac Rhythm & Heart Failure, Coronary & Structural Heart and Aortic & Peripheral Vascular products.

This segment increased revenue by 6% last quarter, in constant currencies.

MDT CVG

Source: Q3 Earnings Presentation, page 9

The Minimally Invasive Therapies group includes the Surgical Solutions and the Patient Monitoring & Recovery divisions. It also grew revenue by 6% last quarter.

The Restorative Therapies Group includes the Spine, Brain Therapies, Specialty Therapies and Pain Therapies divisions. Revenue in this segment increased 4% last quarter.

Medtronic’s diabetes segment was its fastest-growing last quarter, with 7% growth. This happens to be Medtronic’s smallest business unit by far, however, which limits its impact on overall results.

Meanwhile, Becton is a strong company in the industry as well.

It was founded all the way back in 1897. It currently generates $12 billion in annual revenue and operates two major segments: Life Science and Medical.

BDX Overview

Source: CECP 2017 Investor Presentation, page 3

Becton’s revenue breakdown is as follows:

  • 69% Medical.
  • 31% Life Science.

On an adjusted basis, Becton’s EPS grew 20% in 2016, to $8.59. Constant-currency revenue increased 4.3% for the year.

Both of Becton’s segments contributed to growth last year. Revenue in Medical and Life Science increased 4.7% and 3.4%, respectively, in 2016.

Becton’s crown jewels are its medication management and pharmaceutical segments. These two led the way last year, with 10% revenue growth a piece.

Becton’s strong performance last year gives it the advantage.

Another strong business for Becton last year was its diabetes business. Diabetes-related products makes up a significant portion of the Life Science division, the company’s largest segment.

Becton’s diabetes business represents 10% of its U.S. revenue and 14% of its international revenue.

Diabetes is a particularly attractive growth catalyst for Becton and will continue to be a focal point of the company’s growth strategy.

Growth prospects

Winner: Becton

Medtronic expects constant-currency revenue to grow in the mid-single digits in fiscal 2017. EPS is expected to grow by double digits this year.

MDT Guidance

Source: Q3 Earnings Presentation, page 14

A significant portion of Medtronic’s revenue growth forecast is due to the $43 billion acquisition of Covidien in 2015.

And the acquisition is likely to result in significant cost synergies: Medtronic expects to produce $225 million to $250 million in cost savings in fiscal 2017 related to the Covidien acquisition.

Despite a difficult foreign exchange environment, the company still expects to generate $5 billion to $6 billion in free cash flow this fiscal year.

Becton management expects the company to generate 5% revenue growth, along with 10% earnings growth, from 2017 to 2019.

To generate this growth, Becton will invest approximately $3 billion in capital expenditures in that time.

One specific area Becton is targeting more so than Medtronic going forward is diabetes. The company sees diabetes as an emerging category and has rolled out several promising new products to address the market.

BDX Diabetes

Source: CECP 2017 Investor Presentation, page 16

This could give Becton an advantage because according to the company, diabetes results in over $600 billion in direct global medical costs each year.

The company is responding to this challenge with a large diabetes product portfolio, while Medtronic’s diabetes segment remains a very small part of the company.

Separately, Becton is employing an aggressive cost-cutting strategy to boost margins. The company is very skilled at eliminating duplicate costs and finding synergies wherever possible.

BDX Margin

Source: CECP 2017 Investor Presentation, page 23

Becton’s operating margin expanded by 200 basis points in fiscal 2016 and expects to generate another 200 to 225 basis points of margin expansion this upcoming fiscal year.

This is why Becton expects to generate $8 billion in free cash flow through 2019, which will help the company continue to increase dividends at a high rate.

Dividend analysis

Winner: Medtronic

When it comes to dividends, Medtronic has two specific advantages in its corner: a higher dividend yield and higher dividend growth rates.

Medtronic has a current dividend payout of $1.72 per share. This results in a 2.1% dividend yield based on the recent share price.

Meanwhile, Becton pays $2.92 per share in dividends, which yields 1.6% right now.

Medtronic has a slightly above-average dividend yield; the S&P 500 Index yields roughly 2% on average.

However, Becton has a below-average payout. Medtronic’s dividend yield provides approximately 31% more dividend income for every dollar invested in each stock.

Moreover, Medtronic's most recent dividend increase was of 13%, while Becton’s most recent raise was an 11% hike.

Over the past five years, Medtronic and Becton have also averaged 12% and 10% compound annual dividend growth, respectively.

Becton has a payout ratio of 34%, based on 2016 adjusted EPS, compared with a 37% payout ratio for Medtronic.

Therefore, Becton’s dividend growth could exceed Medtronic’s going forward, based on its lower payout ratio and stronger earnings growth.

Final thoughts

Medtronic gets credit for having a higher dividend yield and slightly stronger dividend growth in the past few years.

Becton could be the better stock to own going forward, however. Its earnings grew at a much higher rate last year.

Becton’s growth rates could continue to exceed Medtronic’s, which would likely result in higher dividend growth rates as well.

Both Medtronic and Becton are strong dividend stocks. But Becton is a little bit stronger than Medtronic.

As a result, Becton wins in two out of three categories and is the better dividend growth stock to buy.

Disclosure: I am not long any of the stocks mentioned in this article.

About the author:

Ben Reynolds
I run Sure Dividend, a website that finds high quality dividend stocks for long term investors using the 8 Rules of Dividend Investing.

Visit Ben Reynolds's Website


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