Updated March 22, 2021 by Bob Ciura
At Sure Dividend, we are big believers in investing in high quality dividend growth stocks. We believe that companies with a long history of raising dividends are most likely to reward their shareholders with superior long-term returns. This is why we focus so much on the Dividend Aristocrats.
Our review of each of the 65 Dividend Aristocrats, a group of companies in the S&P 500 Index with more than 25 consecutive years of dividend increases, continues with medical utility company Becton Dickinson (BDX).
You can download an Excel spreadsheet with the full list of all 65 Dividend Aristocrats (plus key metrics such as dividend yields and price / earnings ratios) from the link below:
Becton Dickinson has grown into a global giant. In 2017, Becton Dickinson completed the $ 24 billion acquisition of CR Bard. This was Becton Dickinson’s largest acquisition of all time and brings together two major medical supply companies.
The fundamentals of the industry remain very healthy. The aging of the world population, growth in healthcare spending and expansion in emerging markets are attractive catalysts for growth. In this article, we examine Becton Dickinson’s investment prospects.
Both Becton Dickinson and CR Bard have long operating histories. CR Bard was founded in 1907 by Charles Russell Bard, an American importer of French silk, after he began importing Gomenol to New York City. At the time, gomenol was widely used in Europe and Mr Bard used it to treat his tuberculosis complaints.
CR Bard was incorporated by 1923. It later developed the first balloon catheter and slowly expanded its product portfolio.
Becton Dickinson has now been in business for more than 120 years. Today the company employs more than 40,000 people in over 50 countries. The company has annual sales of around $ 19 billion. Approximately 45% of annual sales come from countries outside of the United States
With CR Bard, Becton Dickinson now has three segments: Medicine, Life Sciences and Intervention, in which Bard products are manufactured. The company sells products in different categories within these businesses. Some of the core product categories include diagnostics, infection prevention, surgical equipment, and diabetes management.
Source: Investor Presentation
On February 4, 2021, BDX released its results for the first quarter of the fiscal year 2021. Revenue rose 25.8% to USD 5.32 billion and exceeded estimates by USD 450 million. Adjusted earnings per share of $ 4.55 was a 72% year-over-year improvement and $ 1.39 per share better than expected. COVID-19 diagnostics revenue was $ 867 million, contributing 20.5% year-over-year growth. Each segment of the company achieved higher sales than in the previous year.
Sales in the Medical segment increased 6.9%, sales in Pharmaceutical Systems increased nearly 10% and sales in Medical Management Solutions increased more than 8%. Geographically, the US improved by 28.8%, international markets by 18.2%, developed countries by nearly 29% and China by 2.2%. BDX has also raised its guidance for fiscal year 2021 and now expects adjusted earnings per share in the range of $ 12.75 to $ 12.85, up from $ 12.40 to $ 12.60.
The merger will offer Becton Dickinson even more growth opportunities in the future. The combined company has annual sales of over $ 17 billion. And with the addition of CR Bard, Becton Dickinson’s total addressable drug management market grew by $ 20 billion.
Becton Dickinson has entered several new growth categories in the US and around the world with CR Bard in tow. First, there are health-related infections, which Becton Dickinson estimates cost patients nearly $ 10 billion each year.
According to Becton Dickinson, every 15th patient will develop an infection during treatment. The newly combined company will be able to treat these untreated conditions, particularly surgical site infections, bloodstream infections, and urinary tract infections caused by catheters.
Next, CR Bard helped add biopsies, meshes, biosurgery and infection prevention devices to Becton Dickinson’s oncology and surgical products. Finally, the acquisition strengthens Becton Dickinson’s international presence, particularly in medical technology. The company already generates almost half of its annual sales outside of the United States
In the long term, the acquisition offers Becton Dickinson the opportunity to expand its reach in new therapeutic areas. The company aims to invest in diabetes, peripheral vascular disease and chronic kidney disease. In addition to organic growth, the acquisition should offer synergies that will increase Becton Dickinson’s earnings.
BDX has increased earnings per share by approx. 8% per year over the past 10 years and increased earnings in 8 of the last 10 years. We believe the company can grow earnings per share by 10% per year through fiscal 2026.
Competitive advantage and recession performance
Becton Dickinson has significant competitive advantages including scalability and a huge patent portfolio. These competitive advantages are due to high capital expenditures.
Becton Dickinson’s research and development expenditures over the past five years are as follows:
- Research and development expenses of $ 828 million in 2016
- Research and development expenses of $ 774 million in 2017
- Research and development expenses for 2018 of $ 1 billion
- 2019 research and development expenses of $ 1.06 billion
- 2020 research and development expenses of $ 1.09 billion
Becton Dickinson has seen a multi-year period of increased research and development expenditures. These expenses have certainly paid off with strong sales and earnings growth over the past few years. The company has earned leadership positions in their respective categories due to product innovations that are a direct result of R&D investment.
These competitive advantages ensure that the company continues to grow even in times of economic downturn. Becton Dickinson grew profits steadily 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, up 16%
- 2009 earnings per share of $ 4.95 (up 11%)
- 2010 earnings per share of $ 4.94, down 0.2%
Becton Dickinson posted double-digit earnings growth in 2008 and 2009 during the worst years of the recession. It took a small step back in 2010, but has continued to grow along with the economic recovery in recent years.
Its ability to consistently grow profits from the Great Recession, arguably the worst economic downturn in decades, is extremely impressive.
The reason for the strong financial performance is that healthcare patients require medical care. Patients cannot do without the necessary health care. This keeps demand stable from year to year regardless of the economic situation.
Becton Dickinson has a unique ability to withstand recessions, which explains its 49-year history in a row
Dividend rises. Becton Dickinson’s dividend is also very safe given its fundamentals.
Valuation and expected returns
With estimated earnings per share of $ 12.80 for fiscal 2021, the stock has a price-to-earnings ratio of 18.8. Our fair value estimate for BDX shares is a P / E of 18.4, which means stocks appear only slightly overvalued. A decrease in the P / E to fair value could reduce the annual return by -0.4% per year over the next five years.
However, valuation isn’t the only factor in estimating total return. Becton Dickinson stock will also generate income from earnings growth and dividends.
Capital investments have fueled Becton Dickinson’s historic returns and should continue to do so. The company is in the enviable position of generating enough cash flow for investments, dividends, and debt reduction, with cash left over.
A possible breakdown of total returns is as follows:
- Earnings per share grow 10%
- 1.4% dividend yield
- -0.4% valuation effect
Based on that outlook, Becton Dickinson could achieve a total return of around 11% by 2026.
In terms of dividends, Becton Dickinson remains a high quality dividend growth stock. It has a very secure payout with room for growth. The company currently pays an annual dividend of $ 3.32 per share. Based on the earnings projections for fiscal 2021, Becton Dickinson is expected to have a dividend payout of approximately 26% for the current year.
This is a very low payout ratio. It leaves plenty of room for sustained dividend growth in the future, especially as earnings will continue to grow.
Becton Dickinson offers a low dividend yield that is just over half the average 2% return on the S&P 500 Index. This could make the stock unattractive to retirees or investors who prefer higher income today. However, due to the annual dividend increases, dividends will add up over the long term.
Becton Dickinson’s business continues to do very well. The company saw solid growth rates, both with and without the addition of CR Bard. Given the positive growth outlook for the healthcare industry, we believe Becton Dickinson has room for strong earnings growth.
In addition, Becton Dickinson has a high likelihood of annual dividend increases for many years to come. With an expected total return of 11% annually and a safe and growing dividend, Becton Dickinson is an attractive stock for investors with dividend growth.
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