Becton Dickinson and Co (NYSE:BDX) is a world leader in medication management and patient safety solutions. The company has been in operation for more than 115 years and has increased its dividend for 44 consecutive years.
With a diverse portfolio of medical products, meaningful exposure to emerging markets and a large acquisition under its belt, BDX appears to be an excellent candidate for long-term dividend growth investors to consider.
While the stock’s 1.7% dividend yield is too low for investors living off dividends in retirement, its total return potential appears to be attractive today.
The smart money sentiment towards Becton Dickinson has been more or less steady. At the end of September, 36 funds among those followed by Insider Monkey reported stakes with an aggregate value of $1.16 billion, amassing 4.20% of the company’s outstanding stock. This compares with 35 investors with positions valued at $1.37 billion in total at the end of the second quarter.
Business Overview
BDX was founded in 1897 and manufactures a wide range of medical supplies, devices, lab equipment, and diagnostics products. Some of its key products include syringes, needles, dispensing systems, and catheters, but its portfolio is well diversified. Many products help hospitals deliver medicines to patients. Customers include hospitals, clinics, physicians’ offices, pharmacies, labs, blood banks, and others.
By geography, the majority of BDX’s sales are from outside of the U.S., and the company generates around 25% of its total sales from emerging markets.
Segments
Medical (68% of sales): medication management solutions, medication and procedural solutions, respiratory solutions, pharma systems, and diabetes care.
Life Sciences (32% of sales): preanalytical systems, diagnostic systems, and biosciences.
Business Analysis
BDX acquired CareFusion for $12.2 billion in March 2015. Analyzing this deal, which was 20 times larger than any acquisition BDX had ever made, will highlight some of the strengths of BDX’s business model.
CareFusion is a provider of medical devices and diagnostic products to hospitals and physicians. This deal essentially doubled the addressable market opportunity that BDX’s medical segment had from $8 billion to $16 billion.
BDX’s extensive distribution channels, which reach all over the world, were a major driver behind the acquisition. CareFusion’s complementary products can be plugged into BDX’s existing channels to reach international markets it had never been in before (60% of BDX’s sales are abroad, but 75% of CareFusion’s business is in the U.S.).
As seen below, BDX will now be able to offer integrated medication management solutions and smart devices – from drug preparation and pharmacy to dispensing on the hospital floor, administration to the patient, and subsequent monitoring.
Source: BDX Investor Presentation
As hospitals increasingly look to cut costs and improve quality, we believe medical device suppliers will likely continue consolidating. With CareFusion under its belt, BDX should be able to better help hospitals manage their drug use and cut down on their waste for several reasons.
First, many of their products are complementary and will allow hospitals to save money by only purchasing from one supplier instead of several. For example, CareFusion manufactures equipment that pumps drugs into the catheters that are currently sold by BDX and put drugs into patients.
Additionally, CareFusion provides BDX with software that helps hospitals track drug usage and the machines they use to store medicines and fill orders. These offerings will become increasingly important as hospitals focus on becoming more efficient.
Other competitors lack the breadth and depth of BDX’s portfolio and seem increasingly likely to get squeezed out by the larger players. BDX’s brand recognition, distribution reach, and economies of scale serve as additional advantages in its markets.
Beyond its comprehensive product portfolio and distribution channels, BDX spends over $600 million on R&D and has built up an arsenal of patents. The healthcare industry also operates under numerous regulations in every country, further raising barriers to entry.
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Key Risks
Similar to our analysis of dividend aristocrat Medtronic, BDX must comply with a variety of healthcare regulations, which could result in pricing pressure, lower reimbursement rates for some of its products, and other unexpected headwinds. For example, part of the Affordable Care Act, which was enacted in March 2010, enacted a 2.3% excise tax on U.S. sales of certain medical devices.
On the flipside, at least in the U.S., healthcare reform is helping more Americans gain health insurance coverage, increasing the number of needles, syringes, and other medical supplies consumed.
Outside if regulatory risk and currency headwinds, the company will have its hands full integrating CareFusion and extracting its expected synergies over the next few years. Given the size of this deal, especially compared to BDX’s historical acquisitions, execution needs to be strong.
All things considered, BDX’s diversified portfolio, recession-resistant products, strong business model, long operating history, and disciplined management team increase the company’s durability.
Dividend Analysis
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. BDX’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
BDX’s dividend Safety Score of 88 is excellent. Over the last four quarters, BDX’s dividend has consumed 45% of the company’s free cash flow, providing plenty of cushion and room for future growth.
Looking longer-term, we can see that BDX’s payout ratios have largely remained between 25% and 40% (the 2015 spike in its EPS payout ratio is due to noisy accounting charges and isn’t significant). Such a stable ratio shows that BDX has done a great job of consistently growing its earnings to fuel its dividend growth and has been consistently profitable.
Source: Simply Safe Dividends
Source: Simply Safe Dividends
Evaluating BDX’s performance during the recession can help us understand how resilience of its business. Many healthcare-related products tend to be more recession-resistant because sick and injured people still need to be taken care of regardless of economic conditions. As seen below, BDX’s sales actually grew each year, and its stock outperformed the S&P 500 by 20% in 2008.
Source: Simply Safe Dividends
The company has also generated a return on invested capital in the mid-teens over the last decade, indicating that the company has an economic moat and has a stable business model.
Source: Simply Safe Dividends
Free cash flow generation is also very important to evaluate when it comes to evaluating the safety of a company’s dividend. Businesses that fail to generate free cash flow must rely on debt and equity markets to keep paying their dividend and are often of lower quality.
BDX has generated positive and growing free cash flow in each of its last 10 years of business.
Source: Simply Safe Dividends
Finally, analyzing the balance sheet is important because companies with high amounts of debt could find themselves in a crunch if business trends deteriorate and they must make interest and debt payments. They will always pay credit holders before issuing a dividend.
BDX’s balance sheet was stretched to finance the company’s acquisition of CareFusion, but management is focused on paying down debt over the next several years. Given the company’s consistent free cash flow generation, we aren’t concerned by the temporarily higher debt load. Importantly, there is plenty of cash flow to comfortably cover a larger interest expense and the dividend.
Source: Simply Safe Dividends
All things considered, BDX’s dividend is extremely safe. With a long operating history, a diversified portfolio of recession-resistant products, and strong brand recognition, BDX is a high quality blue chip dividend stock.
Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Becton Dickinson and Co (NYSE:BDX) achieved an excellent dividend Growth Score of 79, which means that it has some of the strongest dividend growth potential in the market. The company’s favorable rating is driven by its low payout ratios, strong earnings growth, and consistent cash flow generation.
BDX has increased its dividend for 44 consecutive years, firmly securing its spot on the list of dividend aristocrats. The company has consistently increased its dividend at a 10% annual rate over the last decade and most recently raised its dividend by 10% earlier this month.
Assuming BDX meets expectations for continued 10%+ earnings growth, we expect the dividend to continue growing at a similar rate.
Source: Simply Safe Dividends
Valuation
BDX trades at 17.6x forward earnings and offers a dividend yield of 1.8%, which is lower than its five year average dividend yield of 2.0%.
BDX’s management team expects the company’s sales and earnings to grow 4-5% and 10%+ per year, respectively. In other words, the stock appears to offer double-digit total return potential if all goes as planned.
BDX appears to be an excellent business trading at a reasonable price. However, its low dividend yield makes it more appealing for very long-term dividend growth investors.
Conclusion
Becton Dickinson and Co (NYSE:BDX) is an excellent medical technology company. Its acquisition of CareFusion appears to offer numerous long-term growth opportunities as the healthcare landscape continues evolving and international markets spend more on healthcare.
The company’s dividend is extremely safe with excellent growth prospects as well. If the company can deliver on management’s double-digit earnings growth goal, the stock looks attractively priced at less than 18x forward earnings estimates.
While the stock is not currently in our Top 20 Dividend Stocks portfolio, it’s one that long-term dividend growth investors should certainly keep an eye on.
Disclosure: None
