Updated on February 10th, 2022 by Felix Martinez
At Sure Dividend, we are huge proponents of investing in high-quality dividend growth stocks. We believe companies with long histories of raising their dividends are most likely to reward their shareholders with superior long-term returns. This is why we focus so intently on the Dividend Aristocrats.
Our review of each of the 66 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).
You can download an Excel spreadsheet with the full list of all 66 Dividend Aristocrats (plus important metrics like dividend yields and price-to-earnings ratios) by using the link below:
Becton Dickinson has grown into a global giant. In 2017, Becton Dickinson completed its $24 billion acquisition of C.R. Bard. This was 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. In this article, we examine Becton Dickinson’s investment prospects.
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 75,000 employees in over 50 countries. The company generates approximately $20.2 billion in annual revenue. Approximately 43% of annual sales come from outside the U.S.
With the addition of C.R. Bard, Becton Dickinson now has three segments: Medical, Life Sciences, and Intervention, 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: Investor Presentation
On 2/3/2022, BDX released earnings results for the first quarter of the fiscal year 2022. Revenue fell 6% to $4.995 billion, beating estimates by $240 million. Adjusted earnings-per-share of $3.64 was a 20% decline from the prior year and $0.79 per-share better than expected. COVID-19 diagnostic revenues totaled $1,956 million and contributed 9% of the year-over-year growth. Each segment of the company had higher revenue than the prior year except for BD Life Sciences.
Medical segment revenue increased 6.5%, Pharmaceutical Systems grew nearly 29% while Medical Management Solutions revenue increased more than 1.6%. By geography, the U.S. declined 8.9%, international markets were also down 1.7%. BDX also raised its guidance for fiscal 2022 and now expects adjusted EPS in the range of $12.80 to $13.00, up from $12.30 to $12.50 previously.
Source: Investor Presentation
Going forward, the merger presents even more growth opportunities for Becton Dickinson. The combined company has annual revenue of over $17 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. 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. 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. Along with organic growth, the acquisition should provide synergies that will be a boost to Becton Dickinson’s earnings.
BDX has increased earnings-per-share by approximately 8% per year over the past 10 years, and has grown earnings in 8 out of the last 10 years. We feel the company can grow earnings-per-share at a rate of 10% per year through fiscal 2027.
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 five years is as follows:
- 2017 research-and-development expense of $774 million
- 2018 research-and-development expense of $1 billion
- 2019 research-and-development expense of $1.06 billion
- 2020 research-and-development expense of $1.09 billion
- 2021 research-and-development expense of $1.339 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 50-year history of consecutive
dividend increases. Becton Dickinson’s dividend is also very safe based on its fundamentals.
Valuation & Expected Returns
Using estimated earnings-per-share of $12.90 for the fiscal year 2022, the stock has a price-to-earnings ratio of 18.8. Our fair value estimate for BDX stock is a P/E ratio of 21.5, meaning shares appear just slightly overvalued. A decline to the fair value P/E could reduce annual returns by -3.0% per year over the next five years.
But 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
- -3.0% valuation impact
Based on this outlook, Becton Dickinson could generate roughly 8.3% in total returns through 2027.
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 $3.48 per share. Based on fiscal 2022 earnings guidance, Becton Dickinson will likely have a dividend payout of approximately 27% 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.
Becton Dickinson provides a low dividend yield, which is the same 1.3% 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. 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. With expected total returns of 8.3% per year and a safe and growing dividend, Becton Dickinson is an attractive stock for dividend growth investors. However, we rate shares of BDX as a hold due to projected returns.
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Dividend Champions: Dividend stocks with 25+ years of dividend increases, including those that may not qualify as Dividend Aristocrats.
- The Dividend Achievers: dividend stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings: considered to be the ultimate dividend growth stocks, the Dividend Kings list is comprised of stocks with 50+ years of consecutive dividend increases
If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases: