Published by Bob Ciura on March 17th, 2017
The health care sector is a great place to look, for investors in search of high-quality dividend stocks. There are many health care stocks with long track records of raising dividends each year.
Two such companies are Medtronic (MDT) and Becton, Dickinson & Company (BDX). They are both Dividend Aristocrats, a group of companies in the S&P 500 that have raised dividends for 25+ years.
The reason why there are so many health care stocks on the list, including MDT and BDX, is because of the strength of their underlying business models.
In many cases, consumers who need health care services cannot choose to go without them. Generally, this gives large health care companies pricing power and economies of scale.
In turn, this allows many of them to raise their dividends annually. For example, MDT and BDX have increased their dividend payouts for 39 and 45 years in a row, respectively.
This article will compare and contrast these two medical device giants.
Both companies operate in the medical device industry, across a variety of treatment areas.
Medtronic operates four business segments:
- Cardiac and Vascular (35% of sales)
- Minimally Invasive Therapies (34% of sales)
- Restorative Therapies (25% of sales)
- Diabetes (6% of sales)
These businesses performed well in 2016, and are off to a good start to the current fiscal year. Last year, MDT grew adjusted earnings-per-share by 2%.
The Cardiac and Vascular Group is the company’s largest segment. It has many sub-divisions including Cardiac Rhythm & Heart Failure, Coronary & Structural Heart, and Aortic & Peripheral Vascular products.
This segment increased revenue by 6% last quarter, in constant-currencies.
Source: Q3 Earnings Presentation, page 9
The Minimally Invasive Therapies group includes the Surgical Solutions and the Patient Monitoring & Recovery divisions. It also grew revenue by 6% last quarter.
The Restorative Therapies Group includes the Spine, Brain Therapies, Specialty Therapies, and Pain Therapies divisions. Revenue in this segment increased 4% last quarter.
MDT’s diabetes segment was its fastest-growing business last quarter, with 7% growth. However, this happens to be MDT’s smallest business unit by far, which limits its impact on overall results.
Meanwhile, BDX is a strong company in the industry as well.
It was founded all the way back in 1897. It currently generates $12 billion in annual revenue, and operates two major segments: Life Science and Medical.
Source: CECP 2017 Investor Presentation, page 3
BDX’s revenue breakdown is as follows:
- 69% Medical
- 31% Life Science
On an adjusted basis, BDX’s earnings-per-share grew 20% in 2016, to $8.59. Constant-currency revenue increased 4.3% for the year.
Both of BDX’s segments contributed to growth last year. Revenue in Medical and Life Science increased 4.7% and 3.4%, respectively, in 2016.
BDX’s crown jewels are its medication management and pharmaceutical segments. These two led the way last year, with 10% revenue growth apiece.
BDX’s strong performance last year gives it the advantage.
Another strong business for BDX last year was its diabetes business. Diabetes-related products makes up a significant portion of the Lice Science division, the company’s largest segment.
BDX’s diabetes business represents 10% of its U.S. revenue, and 14% of its international revenue.
Diabetes is a particularly attractive growth catalyst for BDX, and will continue to be a focal point of the company’s growth strategy.
MDT expects constant-currency revenue to grow in the mid-single digits in fiscal 2017. Earnings-per-share are expected to grow by double-digits this year.
Source: Q3 Earnings Presentation, page 14
A significant portion of MDT’s revenue growth forecast is due to the $43 billion acquisition of Covidien in 2015.
And, the acquisition is likely to result in significant cost synergies: MDT expects to produce $225-$250 million in cost savings in fiscal 2017, related to the Covidien acquisition.
Despite a difficult foreign exchange environment, the company still expects to generate $5 billion-$6 billion in free cash flow this fiscal year.
BDX management expects the company to generate 5% revenue growth, along with 10% earnings growth, from 2017-2019.
To generate this growth, BDX will invest approximately $3 billion in capital expenditures in that time.
One specific area BDX is targeting more so than MDT going forward, is diabetes. The company sees diabetes as an emerging category, and has rolled out several promising new products to address the market.
Source: CECP 2017 Investor Presentation, page 16
This could give BDX an advantage, because according to the company, diabetes results in over $600 billion in direct global medical costs each year.
The company is responding to this challenge with a large diabetes product portfolio, while MDT’s diabetes segment remains a very small part of the company.
Separately, BDX is employing an aggressive cost-cutting strategy, to boost margins. The company is very skilled at eliminating duplicated costs and finding synergies wherever possible.
Source: CECP 2017 Investor Presentation, page 23
BDX’s operating margin expanded by 200 basis points in fiscal 2016, and expects to generate another 200-225 basis points of margin expansion this upcoming fiscal year.
This is why BDX expects to generate $8 billion in free cash flow through 2019, which will help the company continue to increase dividends at a high rate.
When it comes to dividends, MDT has two specific advantages in its corner—a higher dividend yield, and higher dividend growth rates.
MDT has a current dividend payout of $1.72 per share. This results in a 2.1% dividend yield based on the recent share price.
Meanwhile, BDX pays $2.92 per share in dividends, which yields 1.6% right now.
MDT has a slightly above-average dividend yield; the S&P 500 Index yields roughly 2% on average.
However, BDX has a below-average payout. MDT’s dividend yield provides approximately 31% more dividend income for every dollar invested in each stock.
Moreover, MDT’s most recent dividend increase was a 13% increase, while BDX’s most recent raise was an 11% hike.
And, over the past five years, MDT and BDX have averaged 12% and 10% compound annual dividend growth, respectively.
BDX has a payout ratio of 34%, based on 2016 adjusted earnings-per-share, compared with a 37% payout ratio for MDT.
Therefore, BDX’s dividend growth could exceed MDT’s going forward, based on its lower payout ratio and stronger earnings growth.
MDT gets credit for having a higher dividend yield and slightly stronger dividend growth in the past few years.
However, BDX could be the better stock to own going forward. Its earnings grew at a much higher rate last year.
BDX’s growth rates could continue to exceed MDT’s, which would likely result in higher dividend growth rates as well.
Both MDT and BDX are strong dividend stocks. But BDX is a little bit stronger than MDT.
As a result, BDX wins in two out of three categories, and is the better dividend growth stock to buy.