Published by Bob Ciura on May 3rd, 2017
It’s been a big two weeks for medical technology researcher Becton, Dickinson and Company (BDX). Not only did the company post-better than expected results for its fiscal second quarter, but it has also announced a major acquisition.
Becton, Dickinson has reached a deal to acquire medical supply giant C.R. Bard (BCR) for $24 billion.
The deal brings together two prestigious dividend growth stocks.
Becton, Dickinson and CR Bard are two of 51 Dividend Aristocrats, a group of companies with 25+ consecutive years of dividend increases.
Both companies have increased their dividends for 45 consecutive years.
The acquisition should provide Becton, Dickinson with significant growth moving forward, which will help the company maintain its impressive dividend growth.
This article will provide a rundown of the huge acquisition, and the future implications for Becton, Dickinson investors.
Becton, Dickinson has reached a definitive agreement to acquire CR Bard for $317.00 per share of Bard stock. The takeover will involve a mix of cash and stock.
The deal will allow Becton, Dickinson to expand on its own core competencies, as well as diversify the company into new businesses.
Source: Acquisition Presentation, page 8
BD is a global medical technology company. It helps improve medical care by researching and developing new technologies.
It creates solutions that help advance medical research, and improve the diagnosis and treatment of a variety of diseases including cancer and diabetes. Its research also helps boost the effectiveness of infection prevention and surgical procedures.
It generates approximately $12 billion in annual revenue. It operates two segments, which are Life Science and Medical.
Source: CECP 2017 Investor Presentation, page 3
The company’s revenue breakdown is as follows:
- 69% Medical
- 31% Life Science
Acquiring CR Bard adds a very high-quality business to Becton, Dickinson’s portfolio. CR Bard generated $3.71 billion of revenue in 2016.
CR Bard operates in four segments:
- Vascular (27% of total sales)
- Urology (26% of total sales)
- Oncology (27% of total sales)
- Surgical Specialties (17% of total sales)
It also has an ‘Other’ segment, which generates roughly 3% of annual sales.
The combined company will generate approximately $16 billion in annual revenue, and will expand Becton, Dickinson’s addressable market by $20 billion.
Becton, Dickinson is already a highly successful company. All five of CR Bard’s total segments grew revenue last year.
In 2016, its adjusted earnings-per-share rose 20%. Constant-currency revenue increased 4.3%, and the company cut costs to boost earnings growth.
The deal will make it an even stronger company, as the acquisition will allow Becton, Dickinson to accelerate its revenue and earnings growth.
The best-performing segments for the company last year were Urology and Surgical Specialties, which increased revenue by 14% and 12%, respectively.
Overall, CR Bard generated 10% revenue growth, excluding the impact of currency exchange.
The first benefit from acquiring CR Bard is that it gives Becton, Dickinson the opportunity to expand into three high-growth areas: diabetes, peripheral vascular disease, and chronic kidney disease.
Source: Acquisition Presentation, page 11
It also provides Becton, Dickinson the ability to broaden its existing oncology and surgery businesses.
Combining with CR Bard helps Becton, Dickinson compete more aggressively in oncology and surgery, which are $500 million and $1 billion annual opportunities, respectively.
Source: Acquisition Presentation, page 12
In addition, Becton, Dickinson will generate even higher earnings growth, thanks to expected cost synergies.
Becton, Dickinson expects the deal will be immediately accretive to earnings-per-share, and growth will accelerate to the high single-digit range by 2019.
At Becton, Dickinson’s November Analyst Day event, the company provided expectations for fiscal 2017-2019. At the time, management expected 5% annual revenue growth, 1% operating margin expansion, and 10% earnings growth each year.
Becton, Dickinson expects to realize approximately $300 million in annual, pre-tax, cost synergies by fiscal year 2020.
Source: Acquisition Presentation, page 14
With the acquisition, the company has increased these targets. It now expects as much as 6% revenue growth, along with 2% operating margin expansion, and earnings growth in the mid-teens each year.
Such a strong rate of earnings growth will allow Becton, Dickinson to continue increasing its dividend each year.
Becton, Dickinson currently has an annualized dividend of $2.92 per share. The stock has a current dividend yield of 1.6%.
This is below the average dividend yield of the S&P 500 Index, around 2.1%.
That said, Becton, Dickinson’s dividend is highly secure. It has a payout ratio slightly less than 50% based on the company’s earnings over the past 12 months.
Such a low payout ratio allows the company to grow its dividend at a high rate each year. Over the past five years, Becton, Dickinson has increased its dividend by 10% per year on average.
Its most recent dividend increase was 11%, in 2016.
Its low payout ratio, as well as its growth potential from the CR Bard acquisition, should give the company more than enough room to continue increasing the dividend at a double-digit rate each year.
With the help of CR Bard, in five years, Becton, Dickinson is very likely to become a Dividend King, a group of just 19 stocks with 50+ years of dividend increases.
To see the complete list of Dividend Kings, click here.
While Becton, Dickinson may not be as attractive of a dividend stock for investors interested in a high current dividend yield, it remains a strong holding for dividend growth investors.
Becton, Dickinson has a track record of success in M&A. For example, its $12.2 billion acquisition of CareFusion in 2014 added to Becton, Dickinson’s medical segment, by boosting its drug management and patient safety service businesses.
This acquisition follows up on a similar strategy. Becton, Dickinson has found a high-quality business that can leverage its existing capabilities, as well as give it a presence in new areas.
The huge buyout of CR Bard should bring about significant growth opportunities. Overall, Becton, Dickinson investors should view the deal favorably.
- Becton, Dickinson is one of the top 7 dividend stocks in the healthcare sector for 2017. To see the rest of the list, click here.
- To see how Becton, Dickinson’s dividend compares against fellow Dividend Aristocrat Medtronic (MDT), click here.
- For a more thorough overview of CR Bard’s business model and industry position, click here.