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REHeakins
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Private Wealth Manager / Securities Expert / Co-host of "Investing and Your Legal Rights" heard monthly on www.KQV.com. Over 33 years in the investment industry, first working at PaineWebber for almost 20 years which included 3 years as a branch manager. Currently have a CRCP... More
My company:
OakTree Investment Advisors
My blog:
Covered Call Focus
  • Buy Becton Dickinson (BDX) And Hedge With A Covered Call 0 comments
    Feb 26, 2013 4:36 PM | about stocks: BDX

    Becton Dickinson & Co (NYSE:BDX) is an American-based international medical supply company that develops, manufactures, and sells medical supplies, devices, instrument systems, and reagents. Founded in 1897 and headquartered in Franklin Lakes, New Jersey, Becton Dickinson was one of the first companies to sell U.S.-made glass syringes, and was one of the forefront companies in the development of the modern hypodermic needle. With more than 30,000 employees across 50 countries, Becton Dickinson helps stock the labs and offices of doctors, healthcare institutions, research labs, and pharmacies around the world.

    Becton Dickinson has a market capitalization of $17.05 billion, with 194 million outstanding shares.

    Becton Dickinson currently pays a $0.495 quarterly dividend for a current yield of 2.3%.

    With a beta of 0.71, BDX currently trades with approximately 30% less volatility than the current market.

    Becton Dickinson is a solid long-term stock pick due to its industry, structure, balance sheet, and dividend history. The company itself is divided into three major operations: BD Medical, BD Diagnostics, and BD Biosciences. The most important division is BD Medical, which contributes over $4 billion of BDX's total revenue. This division develops and manufactures medical and surgical systems, pharmaceutical systems, and diabetes care products. We believe that the section of revenue that is produced by diabetes care products will increase moving forward. A medical paper written in the "Diabetes Care Journal" in 2009 used a computer model to predict the population of future diabetics and the related costs in the U.S., 25 years out. The results of the study showed that according to the model, the diabetes population and the related costs associated with the disease are expected to at least double by 2034. As one of the fastest growing health epidemics in the United States, medical companies related to the production of diabetes care products and research will have a growing market for their services. In addition, when you realize that the company makes a large amount of products that are integral to the operation of the medical industries (needles, syringes, etc.) it is even more apparent that their market is quite resilient.

    The company as a whole has a strong balance sheet. While the company has issued over $2 billion in debt over the last three years, they did so at a low interest rate, and used the money to invest at a rate that greatly exceeds that rate, while the debt-to-income remains a bit under 3. They also have bought back over $3.7 billion in stock, and issued $1.1 billion of dividends, helping to create value for investors. Speaking of dividends, the company has 40 consecutive years of dividend increases, with a 7-year growth rate of 14%.

    The stock has projected EPS growth for 2013 and 2014 of 7% and 9% respectively, with both of those estimates being recently upgraded by analysts due to expected strong organic growth. While the P/E ratio of 16 puts the stock in the middle of its 5-Year P/E Range, the valuation is still quite good considering the stock's 10.65% increase year-to-date. The stock also has a U/D Volume Ratio of 2.0 - which is a 50-day ratio that is derived by dividing total volume on up days by the total volume on down days. When the ratio is over 1.0, it shows a positive demand for the stock, in such that on up days investors are more likely to buy the stock than they are to sell the stock on down days. This shows a desire and confidence in the stock such that investors are willing to hold on to it during a bad day for the market, and provides a level of support.

    For a Covered Call Strategy we are recommending selling the June $90 Call for the stock. The stock has had a long-term resistance level at the $90 price mark, failing to break through that level since early 2008. While the increased earnings estimates for the year are a positive catalyst that might help propel the stock through that barrier, the next available strike price for the stock is at $95, which we believe might be a bit of a reach. That is why we are recommending buying BDX and selling the June $90 Call.

    Scenario:

    • Buy 100 shares of BDX @ $88.49 = $8,849 + Commission ($12.95) = $8,861.95
    • Write 1 BDX June 2013 $90 Call @ $160 - Commission ($8.70) = $151.30

    Note: Prices may vary from the time of post. Actual commissions paid will vary returns.


    Static Return (Not Called):

    (Call + Dividend)/Stock Price X (Days/Year)/Days to Expiration

    (1.51 + (2*0.495))/88.62 X (365)/116

    = 8.88% Static Return


    If-Called Return:

    (Call + Dividend + Strike Price - Stock Price)/Stock Price X (Days/Year)/Days to Expiration

    (1.51 + (2*0.495) + 90 - 88.62)/88.62 X (365)/116

    = 13.78% If-Called Return


    Disclosure: Clients and/or principles of OakTree Investment Advisors may or will have an investment in the above positions, but only on the same sides of the trades. The above numbers are analytic estimations based on information known at the time of this post. OakTree Investment Advisors does not guarantee the above, or any, result. All investment decisions should be made based upon individual's personal investment goals and risk tolerance.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BDX over the next 72 hours.

    Stocks: BDX
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