Becton, Dickinson: An Attractive Dividend Growth Stock In The Medical Supplies Industry (NYSE:BDX)

28.96K Followers

Summary

Becton Dickinson is a leader in the medical supply industry. The company generates high levels of free cash flow and returns lots of cash to shareholders.
The acquisition of C.R. Bard provides Becton Dickinson with a strong growth catalyst.
Becton Dickinson is a high-quality Dividend Aristocrat.

By Nate Parsh

Becton Dickinson & Co (NYSE:BDX) is a global leader in the medical supply industry. With more than 4 decades of dividends growth, BD is a member of the Dividend Aristocrats. There are just 53 companies in the S&P 500 with at least 25 consecutive years of dividend increases. You can see all 53 Dividend Aristocrats here.

At the end of 2017, BD finalized its acquisition of C.R. Bard. The combined companies will be a force in the medical supply sector and should reward investors in the years to come in terms of both share price appreciation and dividend growth.

Shareholders of Becton, Dickinson have seen their shares easily outperform the S&P 500 over the past year.

Source: YCharts

While the S&P 500’s return of almost 12% is solid, the index can’t match Becton Dickinson’s gain of 17.69% over the last twelve months. Why has this medical supply company been able to outdo the market index? Part of the reason is that the company’s purchase of C.R. Bard is going to have a significant impact on revenues and earnings. In this article, we’ll examine Becton, Dickinson’s business, most recent earnings results, how the acquisition of C.R. Bard will impact the company going forward and the company’s dividend history to see if the stock should be bought at its current price.

Company Overview

Becton Dickinson has almost 50,000 employees and supplies products to more than 190 countries around the globe. The company has been in business since 1897 and generated more than $12 billion sales in 2017.

Source: 2017 Annual Report

Approximately 67% of sales came from the company’s Medical segment during the year. Products sold in this segment include hypodermic syringes, needles for diabetes care, drug delivery systems and surgical blades. The remainder of sales came from the Life Sciences division, which produces products that are used in the collection and transportation of diagnostic specimens as well as those that test for many different infectious diseases. In 2015, Becton Dickinson finalized its acquisition of CareFusion. CareFusion is a leading supplier of diagnostic products and medical devices to both hospitals and physicians.

Earnings Results

Becton Dickinson reported first quarter earnings for 2018 on 2/6/2018.

Source: Becton, Dickinson’s First Quarter Earnings Results Presentation

Adjusting for tax expense related to tax reform legislation, Becton Dickinson reported first quarter earnings per share of $2.48, $0.07 above estimates. Adjusted EPS results improved 3.9% on currency neutral basis from Q1 2017. The company has managed to top EPS estimates for sixteen consecutive quarters. Revenue in the quarter grew 3.7% year over year to $3.08 billion. Revenues grew just 1.6% in the U.S., but international sales saw growth of 6.3% in the quarter.

Emerging markets were especially strong, seeing sales growth of 10% overall. China, which the company has barely scratched the surface in terms of selling its products, grew 9%. As international sales make up approximately 45% of Becton, Dickinson’s total sales, strong growth in these markets will have a material impact on the company’s financial performance.

The Medical segment saw revenue growth of 1.9% to $2.035 billion. The majority of divisions within this segment showed growth in the quarter. Medication and Procedural Solution grew 5% thanks to continued strong demand for pre-filled devices, infection prevention and surgical products. Thanks to growing demand for pen needles, Diabetes Care saw revenue grow 2.2% while Pharmaceutical Systems saw sales gains of 3.7%. One area of concern that was mentioned several times on the conference call was a change in how much Becton, Dickinson will receive when their medicines are dispensed in the U.S. This impacted the Medical segment’s revenues by 170 basis points during the quarter.

Life Sciences was the segment where Becton Dickinson experienced most of their revenue gains. An early flu season helped Life Sciences grow more than 7% from Q1 2017. Diagnostic Systems saw strong demand for its microbiology products that helped contributed to 12.5% sales growth for this division. The early flu season was credited with 2.6% of this growth. Thanks to demand from research reagents, sales for Biosciences products grew 5.3%. Preanalytical systems grew 4% during the first quarter.

For much of the past 5 years, Becton Dickinson has largely see increasing revenues.

Chart

Source: YCharts

Revenues have declined slightly in the short term, but the company feels that purchasing Bard will help return the company to growth. Management has good reason to feel this way. As a standalone company, Bard was expected to grow revenues by at least 6% to 7% every year. EPS was expected to grow mid-teens going forward.

Bard has four major segments and all showed growth in 2017. In constant currency terms, Vascular grew 10%, Oncology 6%, Urology 5% and Surgical Specialties 5% during the most recent quarter. Incorporating this fast growing company offers Becton, Dickinson the opportunity to really drive growth. The combined companies will generate about $16 billion in sales in 2018. Management says that Bard will be accretive to sales this year, and they have updated their 2018 guidance to reflect this.

2018 Guidance

Bard is going to improve sales and earnings from the first day.

Source: Becton, Dickinson’s First Quarter Earnings Results Presentation

In November, management saw revenue growth for the standalone Becton Dickinson company of 4%-5% for 2018. With Bard on board, the expectation is that sales should now increase 4.5%-5.5% during the year. Growth in sales for Medical is seen as remaining within the company’s November guidance of 4%-5%. Where Bard will have a significant impact on sales is in the company’s other divisions. The company’s previous guidance saw sales growth for Life Sciences in the 4%-5% range. The updated guidance now calls for 4.5%-5.5% growth. The new Interventional segment is expected to see revenue growth of 5.5%-6.5%.

The company is forecasting these revenue growth numbers because Bard has shown strong demand in both developed and emerging markets. China alone should see mid-teen growth for the combined companies. China accounted for less than 6% of total sales in the first quarter for Becton Dickinson, meaning that the company has an opportunity to tap into the potential for this market. With the new Becton Dickinson’s product offerings, management is expecting that sales to China will grow in the ensuing years.

Clearly, the Bard acquisition is going to be a boon to revenue growth. In addition, earnings per share are expected to be much higher than the company’s previous guidance.

Source: Becton, Dickinson’s First Quarter Earnings Results Presentation

Management had previously given EPS guidance of $10.55-$10.65 for 2018. From the midpoint of this guidance, EPS would increase by almost 12% from 2017’s numbers. Thanks in large part to Bard, EPS is now seen as growing by 14%-16% this year. As they are expected to do for revenues, Bard will have a material positive impact on earnings per share as well. Growing earnings will offer the company an opportunity to continue its rich dividend growth history.

Dividend History and Future Growth

While the earnings results showed growth and the Bard acquisition is projected to have a significant impact on the company’s top and bottom lines, it’s really Becton Dickinson’s dividend history that has me toying with the idea of owning the stock. Becton Dickinson has increased dividends each year for the past 46 years. There are only 40 other companies that can claim to have at least as many years of dividend growth as Becton, Dickinson.

On top of that, Becton Dickinson offers fairly consistent dividend growth. Over the past 3-, 5- and 10-year time periods, the company has increased its dividend by an average of 9.6%, 9.8% and 11.6% every year, respectively. As a dividend growth investor, I want to see consistent dividend growth from the companies that I own because this type of growth means that earnings are rather stable. When you have consistent dividend growth, you get a chart that looks like this:

Source: YCharts

When you chart Becton Dickinson’s dividend growth, you see that it is practically a straight line. To be fair, the most recent dividend increase was for just 2.74%. The company did spend $24 billion to purchase Bard and 70% of payment was made in cash. With Bard expected to be accretive starting in 2018, I expect that Becton Dickinson should have more room to raise its dividend back in line with its average dividend growth of 9%-10% going forward. While some might think the company’s dividend yield is too low at 1.4%, 10% dividend increases supported by mid-teen EPS growth could produce a solid yield on cost in just a few years.

Year	Dividend	YOC
2018	$3	1.38%
2019	$3.30	1.52%
2020	$3.63	1.67%
2021	$3.99	1.83%
2022	$4.39	2.02%
2023	$4.83	2.22%
2024	$5.31	2.44%
2025	$5.85	2.69%
2026	$6.43	2.95%
2027	$7.07	3.25%

In a little over 7 years, investors could be looking at a dividend that has doubled. Another factor working for in investors is that Becton Dickinson has a very low dividend payout ratio.

Source: YCharts

Even with steady dividend growth over the past decade, the company’s payout ratio stands at just a little over 37%. This means that Becton Dickinson still has room to grow its dividend very aggressively. Based off of the company’s annualized dividend of $3 means Becton Dickinson is paying out just about 27% of its guidance for 2018. This gives the company ample room to grow the dividend back in line with its previous history.

The reason the company can offer its shareholders double digit dividend increases while keeping its payout low is that Becton, Dickinson generates a lot of cash.

Source: YCharts

While the flow can be a little uneven from year to year, the general trend is towards an increasing amount of free cash produced. Bard’s impact in this area should be felt this year. This cash is why the company’s dividend growth has been so consistent for the last decade or so. Improving fundamentals and low payout ratios are great, but I’m looking for stocks that are trading at attractive valuations.

Valuation

Take a look at the following F.A.S.T. Graphs chart on Becton Dickinson.

F.A.S.T. Graphs says that the current price to earnings multiple of Becton Dickinson’s stock is 21.6. This is about 15.5% above the five year average PE multiple of 18.7. That makes the stock a bit rich for my tastes. However, if you take the midpoint of the company’s 2018 guidance of $10.925, we find that shares are trading at a forward PE of 20. By this measure, shares are about 7% above their five-year average multiple. Still not a bargain, but not nosebleed prices. Keep in mind that Becton Dickinson has beaten EPS estimates for the past sixteen quarters and you can make the argument that shares are trading at an even lower multiple.

Conclusion

Becton Dickinson’s purchase of Bard is going to have a significant impact on the company’s revenues and earnings going forward. Sales are expected to grow 4.5%-5.5% in 2018 and earnings per share should rise by mid double digits. This should allow the company to return to its traditional 9%-10% dividend growth for the foreseeable future. Shares are currently slightly overvalued based on their historical price to earnings multiple, but this is a company with a strong growth trajectory in front them. That makes Becton Dickinson attractive to me. What are your thoughts on this company? Feel free to leave a comment.

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This article was written by

Sure Dividend

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Sure Dividend helps individual investors find high quality dividend growth stocks with strong competitive advantages suitable for long-term holding. The authors who write for Sure Dividend on Seeking Alpha are as follows:Bob CiuraBen ReynoldsJosh Arnold

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