Becton Dickinson (BDX): A Healthcare Dividend Aristocrat With Consistent Double-Digit Dividend Growth
Becton, Dickinson and Company (BDX) is a world leader in medication management and patient safety solutions. The company has been in operation for more than 115 years and has increased its dividend for 44 consecutive years.

With a diverse portfolio of medical products, meaningful exposure to emerging markets and a large acquisition under its belt, BDX appears to be an excellent candidate for long-term dividend growth investors to consider.

While the stock’s 1.7% dividend yield is too low for investors living off dividends in retirement, its total return potential appears to be attractive today.

Business Overview

Becton Dickinson was founded in 1897 and manufactures a wide range of medical supplies, devices, lab equipment, and diagnostics products. Some of its key products include syringes, needles, dispensing systems, and catheters, but its portfolio is well diversified. Many products help hospitals deliver medicines to patients. Customers include hospitals, clinics, physicians’ offices, pharmacies, labs, blood banks, and others.

By geography, the majority of BDX’s sales are from outside of the U.S., and the company generates around 25% of its total sales from emerging markets.

Segments

Medical (68% of sales): medication management solutions, medication and procedural solutions, respiratory solutions, pharma systems, and diabetes care.

Life Sciences (32% of sales): preanalytical systems, diagnostic systems, and biosciences.

Business Analysis

BDX acquired CareFusion for $12.2 billion in March 2015. Analyzing this deal, which was 20 times larger than any acquisition Becton Dickinson had ever made, will highlight some of the strengths of BDX’s business model.

CareFusion is a provider of medical devices and diagnostic products to hospitals and physicians. This deal essentially doubled the addressable market opportunity that BDX’s medical segment had from $8 billion to $16 billion.

Becton Dickinson’s extensive distribution channels, which reach all over the world, were a major driver behind the acquisition. CareFusion’s complementary products can be plugged into BDX’s existing channels to reach international markets it had never been in before (60% of BDX’s sales are abroad, but 75% of CareFusion’s business is in the U.S.).

As seen below, Becton Dickinson will now be able to offer integrated medication management solutions and smart devices – from drug preparation and pharmacy to dispensing on the hospital floor, administration to the patient, and subsequent monitoring.

Becton Dickinson (BDX)

Source: BDX Investor Presentation

As hospitals increasingly look to cut costs and improve quality, we believe medical device suppliers will likely continue consolidating. With CareFusion under its belt, BDX should be able to better help hospitals manage their drug use and cut down on their waste for several reasons.

First, many of their products are complementary and will allow hospitals to save money by only purchasing from one supplier instead of several. For example, CareFusion manufactures equipment that pumps drugs into the catheters that are currently sold by Becton Dickinson and put drugs into patients.

Additionally, CareFusion provides BDX with software that helps hospitals track drug usage and the machines they use to store medicines and fill orders. These offerings will become increasingly important as hospitals focus on becoming more efficient.

Other competitors lack the breadth and depth of BDX’s portfolio and seem increasingly likely to get squeezed out by the larger players. BDX’s brand recognition, distribution reach, and economies of scale serve as additional advantages in its markets.

Beyond its comprehensive product portfolio and distribution channels, Becton Dickinson spends over $600 million on R&D and has built up an arsenal of patents. The healthcare industry also operates under numerous regulations in every country, further raising barriers to entry.

Key Risks

Similar to our analysis of dividend aristocrat Medtronic, Becton Dickinson must comply with a variety of healthcare regulations, which could result in pricing pressure, lower reimbursement rates for some of its products, and other unexpected headwinds. For example, part of the Affordable Care Act, which was enacted in March 2010, enacted a 2.3% excise tax on U.S. sales of certain medical devices.

On the flipside, at least in the U.S., healthcare reform is helping more Americans gain health insurance coverage, increasing the number of needles, syringes, and other medical supplies consumed.

Outside if regulatory risk and currency headwinds, the company will have its hands full integrating CareFusion and extracting its expected synergies over the next few years. Given the size of this deal, especially compared to BDX’s historical acquisitions, execution needs to be strong.

All things considered, Becton Dickinson’s diversified portfolio, recession-resistant products, strong business model, long operating history, and disciplined management team increase the company’s durability.

Dividend Analysis

We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. BDX’s long-term dividend and fundamental data charts can all be seen by clicking here.

Dividend Safety Score

Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

BDX’s dividend Safety Score of 88 is excellent. Over the last four quarters, Becton Dickinson’s dividend has consumed 45% of the company’s free cash flow, providing plenty of cushion and room for future growth.

Looking longer-term, we can see that BDX’s payout ratios have largely remained between 25% and 40% (the 2015 spike in its EPS payout ratio is due to noisy accounting charges and isn’t significant). Such a stable ratio shows that BDX has done a great job of consistently growing its earnings to fuel its dividend growth and has been consistently profitable.

Becton Dickinson (BDX)

Source: Simply Safe Dividends

Becton Dickinson (BDX)

Source: Simply Safe Dividends

Evaluating Becton Dickinson’s performance during the recession can help us understand how resilience of its business. Many healthcare-related products tend to be more recession-resistant because sick and injured people still need to be taken care of regardless of economic conditions. As seen below, BDX’s sales actually grew each year, and its stock outperformed the S&P 500 by 20% in 2008.

Becton Dickinson (BDX)

Source: Simply Safe Dividends

The company has also generated a return on invested capital in the mid-teens over the last decade, indicating that the company has an economic moat and has a stable business model.

Becton Dickinson (BDX)

Source: Simply Safe Dividends

Free cash flow generation is also very important to evaluate when it comes to evaluating the safety of a company’s dividend. Businesses that fail to generate free cash flow must rely on debt and equity markets to keep paying their dividend and are often of lower quality.

Becton Dickinson has generated positive and growing free cash flow in each of its last 10 years of business.

Becton Dickinson (BDX)

Source: Simply Safe Dividends

Finally, analyzing the balance sheet is important because companies with high amounts of debt could find themselves in a crunch if business

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