Updated on February 7th, 2019 by Nate Parsh
Our review of each of the 57 Dividend Aristocrats, a group of companies in the S&P 500 Index with 25+ consecutive years of dividend increases, continues with medical supply company Becton Dickinson (BDX).
Becton Dickinson has grown into a global giant. In 2017, Becton Dickinson completed its $24 billion acquisition of C.R. Bard. This was the Becton Dickinson’s largest acquisition ever and brings together two huge companies in the medical supply industry.
The fundamentals of the industry remain very healthy. Aging global populations, growth of healthcare spending, and expansion in the emerging markets are attractive growth catalysts.
Shareholders have benefited from this growth for decades. Prior to the acquisition, both companies had increased their dividends for more than 40 years in a row. After increasing its dividend by 2.7% on November 19th, 2018, Becton Dickinson has now increased its dividend 47 consecutive years.
Going forward, Becton Dickinson should have no trouble continuing to increase its dividend each year.
Both Becton Dickinson and C.R. Bard have long operating histories. C.R. Bard was founded in 1907 by Charles Russell Bard, an American importer of French silks, after he began importing Gomenol to New York City. At the time, Gomenol was commonly used in Europe, and Mr. Bard used it to treat his discomfort from tuberculosis.
By 1923, C.R. Bard was incorporated. Later, it developed the first balloon catheter, and slowly expanded its product portfolio.
Meanwhile, Becton Dickinson has been in business for more than 120 years. Today, the company employs more than 40,000 employees in over 50 countries. The company generated $16 billion in revenue in fiscal year 2018. Approximately 55% of annual sales come from the U.S., with the remaining 45% derived from international markets.
With the addition of C.R. Bard, Becton Dickinson now has three segments: Medical (54% of sales for FY 2018), Life Sciences (27% of sales) and Intervention (19% of sales) , which houses products manufactured by Bard. The company sells products in several categories within these businesses. Some of its core product categories include diagnostics, infection prevention, surgical equipment, and diabetes management.
Source: Annual Shareholder Meeting
At the time of the acquisition, Becton Dickinson’s revenue growth had slowed to a low single digit growth rate. Revenue growth accelerated to 32% in 2018, thanks largely to the acquisition of C.R. Bard. On a comparable, currency-neutral basis, revenues improved 5.8%. While Bard added a significant amount to revenues for the last fiscal year, Becton Dickinson’s growth rate also improved.
Comparable revenues for the Medical segment improved 10.1% for the fourth quarter and 5.6% for 2018. All of the individual divisions within Medical showed growth during the year. The company expanded operating margin by 350 basis points to 25.3% for 2018. Overall, earnings-per-share increased 16% to $11.01 in fiscal 2018.
Fiscal 2019 is off to another good start in ots most recent quarter. Becton Dickinson’s revenue increased 35% (including the with C.R. Bard acquistions) and 5.2% on a comparable basis (excluding the C.R. Bard acquisition) versus the same quarter a year ago . Earnings-per-share grew 9% over the same time period, and the company expects earnings-per-share to grow 10% in fiscal 2019.
Going forward, the merger presents even more growth opportunities for Becton Dickinson. The combined company has annual revenue of approximately $16 billion. And, after adding C.R. Bard, Becton Dickinson’s total addressable market in medication management increased by $20 billion.
Becton Dickinson has been able to enter several new growth categories with C.R. Bard in tow, in the U.S. and around the world.
Source: Annual Shareholder Meeting
First, there are healthcare associated infections, which Becton Dickinson estimates costs patients nearly $10 billion every year.
According to Becton Dickinson, one out of every 15 patients acquires an infection during care. The newly combined company will be able to treat these unaddressed conditions, specifically in surgical site infections, blood stream infections, and urinary tract infections caused by catheters.
Next, C.R. Bard has helped expand Becton Dickinson’s oncology and surgery products, in biopsies, meshes, biosurgery, and infection prevention devices. After the merger, Becton Dickinson has an oncology and surgery business generating annual sales of $1.5 billion.
Lastly, the acquisition boosts Becton Dickinson’s international presence, particularly in medical technology. The company already generates nearly half of its annual sales from outside the U.S.
Over the long-term, the acquisition provides Becton Dickinson the opportunity to expand its reach in new therapeutic areas. The company is targeting investment in diabetes, peripheral vascular disease, and chronic kidney disease.
C.R. Bard also opens up expansion opportunities in emerging markets such as China. Last quarter, comparable sales outside the U.S. rose 8.7%.
Along with organic growth, the acquisition should boost Becton Dickinson’s earnings. In its first-quarter financial report, the company reiterated its guidance of 10% growth for the full year. From 2019-2020, management expects earnings growth in the mid-teens, thanks to revenue growth and operating margin expansion.
Competitive Advantages & Recession Performance
Becton Dickinson has significant competitive advantages, including scale and a vast patent portfolio. These competitive advantages are due to high levels of investment spending.
Becton Dickinson’s research and development spending in the past several years is as follows:
- 2014 research-and-development expense of $550 million
- 2015 research-and-development expense of $632 million
- 2016 research-and-development expense of $828 million
- 2017 research-and-development expense of $774 million
- 2018 research-and-development expense of $1 billion
Becton Dickinson is coming off a multi-year period of elevated research and development spending. This spending has certainly paid off, with strong revenue and earnings growth over the past several years. The company has obtained leadership positions in their respective categories because of product innovation, a direct result of R&D investments.
These competitive advantages provide the company with consistent growth, even during economic downturns. Becton Dickinson steadily grew earnings during the Great Recession. Becton Dickinson’s earnings-per-share during the recession are as follows:
- 2007 earnings-per-share of $3.84
- 2008 earnings-per-share of $4.46 (16% increase)
- 2009 earnings-per-share of $4.95 (11% increase)
- 2010 earnings-per-share of $4.94 (0.2% decline)
Becton Dickinson generated double-digit earnings growth in 2008 and 2009, during the worst years of the recession. It took a small step back in 2010, but continued to grow in the years since, along with the economic recovery.
The ability to consistently grow earnings each year of the Great Recession, which was arguably the worst economic downturn in decades, is extremely impressive.
The reason for its strong financial performance, is that health care patients need medical supplies. Patients cannot choose to forego necessary healthcare supplies. This keeps demand steady from year to year, regardless of the condition of the economy.
Becton Dickinson has a unique ability to withstand recessions, which explains its 40+ year history of consecutive dividend increases.
Valuation & Expected Returns
Shares of Becton Dickinson are currently trading at a price $243. Using the company’s earnings-per-share guidance of $12.10 for fiscal year 2019, the stock has a price-to-earnings ratio of 20.1. Becton Dickinson’s stock trades nearly in line with the valuation of the S&P 500 index.
A complete breakdown of Becton Dickinson’s historical average price-to-earnings ratios can be seen in the table below:
Over the last decade, earnings-per-share have grown at a rate of 7.8%. We estimate that with C.R. Bard, Becton Dickinson can grown earnings-per-share by 10% annually. Applying this estimate to the long term average valuation, we have 2024 target valuation of 18.4 for the stock.
Valuation isn’t the only factor in estimating total returns. Becton Dickinson’s stock will generate returns from earnings growth and dividends as well.
Capital investments have fueled Becton Dickinson’s historical returns, and should continue to do so. The company is in the enviable position of generating enough cash flow for capital expenditures, dividends, and debt reduction, with cash left over.
A potential breakdown of total returns is as follows:
- 10% earnings-per-share growth
- 1.3% dividend yield
- 1.8% valuation reversion
Based on this outlook, Becton Dickinson could generate 9.5% in total returns through 2024.
As far as dividends, Becton Dickinson remains a quality dividend growth stock. It has a very secure payout, with room for growth. The company currently pays an annual dividend of $3.08 per share. Based on 2019 earnings guidance, Becton Dickinson will likely have a dividend payout of approximately 25.5% for the current year.
This is a very low payout ratio. It leaves plenty of room for sustained dividend growth moving forward, particularly since earnings will continue to grow. The last two increases have been just 2.7%, far below the company’s double-digit average rate over the previous decade. This is due to the amount of cash that Becton Dickinson used to purchase C.R. Bard.
Becton Dickinson provides a low dividend yield, which is roughly half the 2% average yield of the S&P 500 Index. This might make the stock unattractive for retirees, or investors who prefer higher levels of income today. However, its dividends will add up over the long term due to the annual dividend increases.
Becton Dickinson’s business continues to perform very well. The company posted solid growth rates, both with and without the addition of C.R. Bard last fiscal. Given the positive growth outlook for the healthcare industry, we feel that Becton Dickinson has room for strong earnings growth.
In addition, Becton Dickinson has a high likelihood of annual dividend increases for many years. That said, the stock has a relatively low dividend yield of 1.3%, which is well below the average yield of the S&P 500 Index.
Furthermore, Becton Dickinson stock appears to be overvalued today, which negatively impacts its future return potential. As a result, we rate shares as a hold at current prices, and recommend investors interested in Becton Dickinson wait for a pullback before buying shares.