Value Investing

Dividend Aristocrats Part 26 Of 52: Becton Dickinson and Co (BDX)

Dividend Aristocrats Part 26 Of 52: Becton Dickinson and Co (BDX) by Ben Reynolds, Sure Dividend

Becton Dickinson and Co (BDX) was founded in 1897 and has increased its dividend payments for 43 consecutive years.

The company’s longevity speaks to the stability of the medical devices and supply industry in which BDX operates.

When I last analyzed the company, it had recently announced that it would be acquiring CareFusion.  The company was ranked as a Top 10 dividend stock using The 8 Rules of Dividend Investing.  Since that time, BDX stock has gained 17.9%, versus 7.9% for the S&P 500.

BDX has a long growth runway ahead.  Does the company’s dividend yield and valuation make it a compelling purchase today, or should potential shareholders wait for a better entry point?  Keep reading to find out.

The image below shows BDX’ business broken down by segment and operating unit:

Becton Dickinson and Co (BDX)

Source:  BD Acquisition of Carefusion Presentation, slide 10

Research & Supply Based Competitive Advantage

Becton Dickinson and Co’ competitive advantage comes from its global reach, strong supply lines, and well established relationships with customers and governments.

New entrants to the medical supplies industry would find it costly and difficult to recreate BDX’s global supply chain and relationships with customers.

Becton Dickinson and Co has a long history of innovation.  The company’s ability to generate revenue from new products and market them through its established distribution network is a competitive advantage that fuels growth for the company.  The image below shows the new products the company has planned for the following year:

Becton Dickinson and Co (BDX)

Source:  BDX Q4 2015 Presentation, slide 20

BDX Has Double-Digit Total Return Potential

BDX has grown its earnings-per-share at compound rate of 10.4% a year since 1999.  The company’s growth is a result of product innovation, acquisitions, and favorable trends in the health care industry.

In March of 2015, Becton Dickinson and Co completed its acquisition of Carefusion for $12.6 billion – about 40% of BDX’s market cap.  The acquisition has reshaped BDX by giving it an even deeper portfolio of medical devices and more global reach.

It has also created significant cost-cutting opportunities.  Cost reductions will be the biggest growth driver for BDX in 2016.  The company’s management is now projecting currency neutral earnings-per-share growth of around 17% in fiscal 2016.

The acquisition saddled BDX with an additional $7.7 billion in debt.  The company now has around $13 billion in total debt on its balance sheet.  The company plans to pay down its debt over the next several years.  This deleveraging will likely come at the cost of share repurchases.  From 2005 through 2014, BDX reduced its share count at 2.8% a year on average.  I expect share repurchases to be eliminated until the company’s debt load is reduced by between 30% and 50%.

BDX’ management is expecting earnings-per-share growth of ~21% on a currency neutral basis, or 17% accounting for currencies in fiscal 2016.

Over the long run, the company will not be able to keep up such a rapid growth rate.  I expect BDX to grow its earnings-per-share at between 9% and 11% over the long run, in line with its historical growth numbers.

The company’s 9% to 11% expected earnings-per-share growth rate combined with its current 1.6% dividend yield gives investors expected total returns of 10.6% to 12.6% a year.

Becton Dickinson and Co Dividend Analysis

BDX has paid increasing dividends for an amazing 43 consecutive years.  It is highly likely the company continues to pay increasing dividends.

BDX increased its dividend payments by 10.1% in 2015.  The company has compounded its dividend payments at 13.0% a year since 1999.

The company currently has a payout ratio of 33.5%.  I expect BDX to continue paying out approximately 33% of earnings as dividends to shareholders.

I believe Becton Dickinson and Co will hike its dividend commensurate with earnings-per-share growth in 2016.  This implies a dividend increase of approximately 17%.  After 2016, I expect the company to continue rewarding shareholders with dividend increases of approximately 10% a year, in line with company earnings-per-share growth.

BDX Stock Is Somewhat Over-Valued

Becton Dickinson and Co average annual price-to-earnings ratio since 1999 is around 17.86.  The image below shows the company’s historical price-to-earnings ratio through time:

Becton Dickinson and Co (BDX)

Source:  Data from Value Line

BDX is currently trading for a price-to-earnings ratio of 21.1.  The company is trading at an 18.0% premium to its historical average price-to-earnings ratio.

To be fair, Becton Dickinson and Co is expected to see a dramatic earnings-per-share increase in 2016.  Management is forecasting expected earnings-per-share of $8.41 for fiscal 2016.

If BDX earnings-per-share hit $8.41 in fiscal 2016, and the company’s price-to-earnings ratio falls to its historical average of 17.86, this implies a share price of ~$150 by the end of 2016.  This is where shares are trading today.

BDX’s historically above-average price-to-earnings ratio is discounting all of the company’s 2016 growth.  As a result, I believe BDX to be slightly overvalued at this time.

Recession Performance

Becton Dickinson and Co performed remarkably well through the Great Recession of 2007 to 2009.

The company saw earnings-per-share increase each year from 2007 through 2009.  BDX’s managed to grow earnings while most companies were seeing steep declines.

BDX earnings-per-share through the Great Recession of 2007 to 2009 are shown below:

  • 2007 earnings-per-share of $3.84
  • 2008 earnings-per-share of $4.46
  • 2009 earnings-per-share of $4.95

The company is able to perform well through recessions because it operates in the health care industry.  Health care providers cannot cut down on medical supplies, regardless of the economic climate.  Similarly, patients don’t stop needing treatment because the economy is down.  This makes the health care industry in general fairly recession proof.

Final Thoughts On BDX

Becton Dickinson and Co is a bit overvalued at current prices.

This does not take away from the fact that the company has solid growth potential and a strong and durable competitive advantage.

If you are currently a shareholder of BDX, you should hold for the long run.

If you have not yet purchased shares of Becton Dickinson and Co, waiting to do so until the company’s price-to-earnings ratio falls around its historical average would be wise.  At current earnings levels, this would be a share price of around $128 a share.

Despite being slightly overvalued, BDX currently has an above-average rank using The 8 Rules of Dividend Investing because of its stability and favorable growth prospects and total return potential.  Still, potential investors should wait for the company’s stock to fall to around its historical average price-to-earnings ratio before buying shares of this great business.