Value Investing

Becton Dickinson: 19% EPS Growth, Dividends, & Safety

Becton Dickinson: 19% EPS Growth, Dividends, & Safety


Published June 25th, 2016 by Arie Goren

Becton, Dickinson and Company [BD] (BDX) is a Dividend Aristocrat thanks to its 44 years of consecutive dividend increases.

Most businesses with long histories of success don’t expect rapid growth…  But that’s not the case at BD.

Case-in-point:  BD is expecting 19% to 20% earnings-per-share growth this fiscal year.

This article explores the current events and growth prospects of one of the fastest growing Dividend Aristocrat health care stocks.

Brief BD Overview

Becton, Dickinson develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. The company was founded in 1897 and is headquartered in Franklin Lakes, New Jersey.

BD operates through two global business segments: BD Medical and BD Life Sciences.

BD Overview

Source: J. P. Morgan Healthcare Conference Presentation

Newest Quarterly Results

On May 5, BD reported its second-quarter fiscal 2016 financial results, which beat adjusted earnings-per-share expectations by a significant margin of $0.16 (7.9%). The company posted revenue of $3.07 billion in the period, also exceeding Street forecasts of $3.06 billion.

BD Q2 2016 Highlights

Source: Q2 2016 Earnings Presentation

BD has shown earnings-per-share surprise in all its last four quarters, as shown in the table below.

BD EPS Surprise

Source: Yahoo Finance

In the report, Vincent A. Forlenza, Chairman, CEO and President, said:

“We are pleased with our second quarter revenue growth and strong operating performance. Our results this quarter continue to demonstrate the breadth and diversity of the growth drivers within our portfolio. This performance enables us to continue to create value for shareholders and provides us with the capacity to invest for the future.”

Guidance for BD

The company raised its full fiscal year 2016 guidance for revenue growth and adjusted earnings-per-share to reflect diminishing currency headwinds.

BD said that it expected revenue growth of 21.5%-22.0%, an increase from the previously issued guidance of 20.0%-20.5% growth.

BD also raised its fiscal 2016 adjusted diluted earnings per share guidance to be between $8.50 and $8.57 which represents growth of approximately 19.0%-20.0%, an increase from the previously issued guidance of $8.37 to $8.44 which represented approximately 17.0%-18.0% growth.

In short, the company is expecting excellent growth in its current fiscal year.

Acquisitions and Divestitures

BD is continually improving its growth prospects through promising acquisitions and divestitures of underperforming businesses.

On March 17, 2015, BD announced that it completed its acquisition of CareFusion. According to the company, that $12.2 billion mega deal represented a major milestone in BD’s 118-year history. BD also said that the acquisition significantly accelerates BD’s strategy and builds scale and depth in medication management and patient safety solutions.

CareFusion is a leading provider of medical devices and diagnostic products to hospitals and physicians. According to the company, it is on track to achieve its estimate cost synergies from CareFusion of $250 million by the fiscal year 2018, and it is also seeking revenue synergies.

BD has completed the registration of more than 50 CareFusion products in 20 countries and is awaiting registration approval for an additional 25 products. It will sell these products through the BD’s global distribution network.

On March 8, the company announced a definitive agreement to sell 50.1% of its Respiratory Solutions business to funds advised by Apax Partners, a leading global private equity firm, and form a joint venture that will operate as a new, independent company.

Also, On April 21, BD announced that it has sold its vertebral augmentation solutions business-branded products to Stryker (SYK). According to the company, the sale will not have a material impact on revenue and earnings for fiscal 2016.

In my view, BD’s decision to eliminate non-core businesses makes sense. This allows the company to focus on growing projects, avoiding the necessity to invest resources and management time in slow-growing businesses.

Key Growth Drivers

I see continued high growth prospects for the company.

Apart from acquisitions, BD is developing many new products. According to the company, it has a series of different new products across every business that will hit over this year and the next several years.

Also, the company is continuing its geographic expansion strategy, especially in emerging-market, which is currently increased with the products that BD is moving outside of the U.S. from CareFusion. International revenues of $1,349 million in the last quarter accounted for 43.9% of the total revenues in the quarter.

BD’s international and emerging market growth plans are similar to Abbott Labs’ (ABT) plans.  Both companies are looking to capitalize on the rapidly growing middle classes of emerging markets and aging global populations.

Another market with significant growth prospects for the company is for self-injection products. According to BD, that market overall is growing about 20%.

BD Growth

Source: Q2 2016 Earnings Presentation

Dividend Analysis

Although the current annual dividend yield is not high at 1.6%, the company is raising its dividend payment every year at a significant rate.

The annual rate of dividend growth over the past three years was high at 10.1%, over the past five years was also high at 10.2%, and over the last ten years was very high at 12.8%. The payout ratio is at 65.8%.

I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors. Increasing dividends is the assurance that dividend income at least retains its purchasing power over time.

 BDX Dividend

Source: company’s reports  *assuming same dividend rate for the year

Valuation Analysis

According to TipRanks, the average target price of the top analysts is at $177, an upside of 4.1% from its June 21 close price, however, in my opinion, shares could go higher.

BD’s valuation is not bad; the forward P/E is at 17.6, and the price to cash flow is around 18.5. The Enterprise Value/EBITDA ratio is low at 14.62, and the PEG ratio is at 1.50.

Furthermore, the average annual estimated earnings-per-share growth for the next five years is high at 13.1%.

BD is by no means a bargain stock at current prices, but it is likely trading around fair value.  Businesses with shareholder friendly managements, strong growth potential, and competitive advantages don’t need to be trading at a steep discount to fair value to provide investors good total return potential.

Final Thoughts

BD’s combination of growth in the medical industry, a long history of rising dividends, and a reasonable valuation make it a top 30 dividend stock usingThe 8 Rules of Dividend Investing.

BD delivered first quarter results that were better than analysts’ expectations, and raised its full fiscal year 2016 guidance for revenue growth and adjusted earnings-per-share.

BD has shown earnings-per-share surprise in all its last four quarters. BD is poised to show strong growth in the next few years, due to organic development and successful acquisitions. The CareFusion deal has been a smart move by the company as well.

Although the current annual dividend yield is not high at 1.6%, the company is raising its dividend payment