Company Description: Becton, Dickinson and Co. provides a wide range of medical devices and diagnostic products used in hospitals, doctors' offices, research labs and other settings.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
BDX is trading at a premium to all four valuations above. The stock is trading at a 14.2% premium to its calculated fair value of $101.3. BDX did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
BDX earned two Stars in this section for 1.) and 2.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 41 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
BDX earned a Star in this section for its NPV MMA Diff. of the $516. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as BDX has. If BDX grows its dividend at 10.1% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 3.31%.
Memberships and Peers: BDX is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: The CR Bard Inc. (NYSE:BCR) with a 0.6% yield, Baxter International Inc. (NYSE:BAX) with a 2.8% yield and Medtronic, Inc. (NYSE:MDT) with a 1.9% yield.
Conclusion: BDX did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks BDX as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $116.77 before BDX's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 41 years of consecutive dividend increases. At that price the stock would yield 1.9%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 10.0%. This dividend growth rate is virtually the same as the 10.1% used in this analysis, thus providing no margin of safety. BDX has a risk rating of 1.25 which classifies it as a Medium risk stock.
In spite of operating in the competitive medical equipment market, BDX has enjoyed more favorable demand and pricing than others in the industry. The company's needle and surgical business has provided investors with robust returns for years. Strong global demand for the company's safety, diabetes care and disease-testing products should be sustainable in the foreseeable future.
The majority of BDX's sales are coming from international markets, and this should continue to be an upside in 2014 based on continued growth in emerging markets. Changes in domestic and foreign health care industry practices and regulations may result in increased pricing pressures and lower reimbursements. Also, funding cuts to the National Institutes of Health budget will hurt its biosciences sales. Generally, health care products are largely immune to economic cycles with long-term demand benefiting from demographic growth of the elderly.
BDX operates in a highly competitive industry characterized by rapid technological change and new market entrants. The company faces a number of highly-focused competitors in each of its three business segments and in each market in which its products are sold. The stock is now trading at a premium to my calculated fair value of $101.30 and its current yield is under 2.0%. As such, BDX is not a serious contender for any of my income portfolios.
Full Disclosure: At the time of this writing, I held no position in BDX (0.0% of my Dividend Growth Portfolio) and was long MDT in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.