Danaher (NYSE:DHR) is a buy for the total return growth investor. It is one of the largest manufacturers and distributors of medical, industrial, and commercial products. The last dividend increase declared in February 2020 was an increase from 0.17/Qtr to 0.18/Qtr, or a 6% increase. For the last five years, the dividend growth rate is 18%, making up a bit for the low yield.
I use a set of guidelines that I have codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am reviewing. For a complete set of guidelines, please see my article "The Good Business Portfolio: Update to Guidelines, August 2018". These guidelines provide me with a balanced portfolio of income, defensive, total return, and growing companies that hopefully keeps me ahead of the Dow average.
When I scanned the five-year chart, Danaher has a good chart going up and to the right for 2016-2020 YTD in a strong solid pattern. Danaher is underpriced and is on sale with the present correction in the market.
The company is reviewed in the following topics below.
- The Good Business Portfolio Fundamentals
- Company Business
- Portfolio Management Highlights
Good Business Portfolio Fundamentals
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. My total return guideline is that total return must be greater than the Dow's total return over my test period. Danaher beats against the Dow baseline in my 50-month test compared to the Dow average. I chose the 50-month test period (starting January 1, 2016, and ending to date) because it includes the great year of 2017 and 2019, and other years that had a fair and bad performance. The great Danaher total return of 116.20% compared to the Dow base of 41.58% makes the company a great investment for the total return investor that also wants some increasing income. Looking back five years, $10,000 invested five years ago would now be worth over $25,700 today. This gain makes Danaher a great investment for the total return investor looking back, which has future growth as the United States economy continues to grow to need more of the company’s medical and industrial products.
Dow's 50-Month total return baseline is 49.59%.
The company does not meet my dividend guideline of having dividends increase for 8 of the last ten years and having a minimum of 1% yield. Danaher has a below-average dividend yield of 0.45% and has had increases for 8 years, making it a poor choice for the dividend growth investor. The dividend was just increased in February 2020 for an increase from $0.17/Qtr to $0.18/Qtr, or a 6% increase. The five-year average payout ratio is low at 15%. After paying the dividend, this leaves cash remaining for increasing the business of the company by buying bolt-on companies and developing new additions to the product line.
I also require the CAGR going forward to be able to cover my yearly expenses and my RMD with a CAGR of 7%. My dividends provide 3.3% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.2% plus an inflation cushion of 1.8%. The three-year forward S&P CFRA CAGR of 11% exceeds my guideline requirement. This strong future growth for Danaher can continue its uptrend benefiting from the continued strong growth in the United States economy.
I have a capitalization guideline where the capitalization must be greater than $10 billion. Danaher easily passes this guideline. It is a large-cap company with a capitalization of $113 billion. Danaher's 2020 projected cash flow at $4.1 billion is good, allowing the company to have the means for growth each year. Large-cap companies like Danaher have the cash and ability to buy other smaller companies and weather any storms that might come along.
One of my guidelines is that the S&P rating must be three stars or better. Danaher's S&P CFRA rating is three stars, or Hold, with a target price to $164, passing the guideline. The stock price is below this target by 11%. Danaher is below the target price at present and has a high forward P/E of 29, making it a good buy at this entry point. Considering the potential growth and stability of the company, if you are a long-term investor that wants good increasing future total return growth, you may want to look at this company.
One of my guidelines is, would I buy the whole company if I could? The answer is "yes". The total return is strong, but the below-average dividend makes Danaher a good business to own for the growth investor. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business, and also generates a good income stream. Most of all, what makes Danaher interesting is the long-term demand for medical-related supplies that are needed for the growing senior citizen population.
I don’t have a guideline for earnings, but look for the earnings of my positions to consistently beat their quarterly estimates. For the last quarter on January 30, 2020, Danaher reported earnings that beat expected by $0.04 at $1.28, compared to last year at $1.14. Total revenue was higher at $4.87 billion more than a year ago by 5.9% year over year and beat expected total revenue by $70 million. This was a good report with the bottom line beating expected and the top line increasing with a good increase compared to last year. The next earnings report will be out late April 2020 and is expected to be $1.11 compared to last year at $0.46 - a great increase. The graphic below shows the earnings comparison between 2019 and 2018.
(Source: 4th Quarter earnings call slides)
Danaher is one of the largest manufacturers and marketers of professional medical and industrial products in the United States.
As per data from Reuters:
As of December 31, 2016, the Company's research and development, manufacturing, sales, distribution, service, and administrative facilities were located in over 60 countries. Danaher operates through four segments: Life Sciences, Diagnostics, Dental, and Environmental & Applied Solutions. The Company's Life Sciences segment offers a range of research tools that scientists use to study the basic building blocks of life, including genes, proteins, metabolites, and cells, in order to understand the causes of disease, identify new therapies and test new drugs and vaccines. The Life Sciences segment consists of the businesses, including microscopy, mass spectrometry, and filtration. The life sciences business markets its products under the BECKMAN COULTER, LEICA MICROSYSTEMS, MOLECULAR DEVICES, PALL, PHENOMENEX, and SCIEX brands. Its manufacturing facilities are located in Europe, Australia, Asia, and North America.
Danaher is in the right business of supporting the medical sector with excellent products that have increasing need as the senior citizen's percentage grows in the world. The good earnings and revenue growth provides Danaher the capability to continue its growth as the cash flow increases with the addition of the General Electric (GE) division buy. The graphic below shows the progress of the existing Life sciences division that will grow even bigger with the GE addition.
(Source: 4th Quarter earnings call slides)
From the 4th quarter earnings call:
Our fourth-quarter results wrapped up a tremendous 2019 for Danaher. For the full year, we delivered 6% core revenue growth as we continued to capture market share in many of our businesses through new product innovation and enhanced commercial execution. We also delivered 100 basis points of core operating margin expansion and $3 billion of free cash flow. But the numbers only tell part of Danaher's transformative story in 2019. We continued to evolve into a higher growth company as we announced the GE Biopharma acquisition and completed the IPO and subsequent split-off of our Dental segment into an independent publicly-traded company called Envista. As a result, we now believe GE Biopharma will be approximately $0.60 accretive to non-GAAP adjusted diluted net earnings per share in 2020. This assumes an end of the first-quarter close and includes the impact of the lower financing cost, and the business is better than 2019 core revenue growth, partially offset by the lost earnings related to the pending divestitures.
This shows the feelings of top management for the continued growth of the Danaher business with an increase in future growth. The company has good constant growth and will continue as the United States and worldwide economies and population grow. The growth is being driven by buying bolt-on companies, like the GE acquisition adding to the company’s existing services and products.
Danaher is a good investment choice for the total return growth investor. It is 1.0% of The Good Business Portfolio and will be added to as cash is available. If you want a growing total return in a defensive business, DHR may be the right investment for you. The entry price right now is below the one-year forward expectation. Long-term investors may want to consider this good business and buy the dip.
Portfolio Management Highlights
The five companies comprising the largest percentage of the portfolio are Johnson & Johnson (JNJ) at 8.0% of the portfolio, the Eaton Vance Enhanced Equity Income Fund II (EOS) at 8.2% of the portfolio, Home Depot (HD) at 9.4% of the portfolio, Omega Healthcare Investors (OHI) at 9.2% of the portfolio, and Boeing (BA) at 11.2% of the portfolio. Therefore, BA, EOS, JNJ, OHI, and HD are now in trim or close to trim position, but I am letting them run a bit since they are great companies.
- On February 4, I trimmed HD to 9% of the portfolio. HD is a great business but needs more foreign expansion to grow even stronger.
- On January 13, I trimmed DHR to 1.5% of the portfolio. I like DHR long term, but the next year's earnings look a bit weak, and I need cash for my RMD.
- On December 5, I wrote covered calls against my Danaher position to collect another premium ($1.54/share December $150). I like DHR, but it’s getting a bit pricey, and the covered calls give me some extra income and some downside protection. On December 19, I closed the position by buying back the calls and made a small profit.
Boeing is going to be pressed to 15% of the portfolio because of it being cash flow positive on 787 deferred plane costs at $1.3 billion in the third quarter of 2019, an increase from the second quarter. The stock has dropped in the last ten months because of the second 737 Max crash, and I look at this as an opportunity to buy BA at a reasonable price. From the latest news on Boeing is a rumor that Warren Buffett is taking a position on BA - maybe he knows a good investment. It now looks like the 737 Max will not be approved until mid-year, but the FAA has said it could be earlier because Boeing is making good progress. All will depend on the first test flight with the FAA.
JNJ will be pressed to 9% of the portfolio because of its defensive nature in this post-Brexit world. Earnings in the last quarter beat on the top and bottom lines, and Mr. Market did nothing. JNJ in April 2019 increased the dividend to $0.95/Qtr., which is 57 years in a row of increases. JNJ is not a trading stock but a Hold forever; it is now a Strong Buy as the healthcare sector remains under pressure.
The total return for the Good Business Portfolio is ahead of the Dow average from 1/1/2020 to date by 3.49%, which is a good gain above the market for the portfolio with BA a strong drag. Each quarter after the earnings season, I write an article giving a complete portfolio list and performance. The latest article is titled “The Good Business Portfolio: 2019 3rd Quarter Earnings and Performance Review”. Become a real-time follower, and you will get each quarter's performance after the next earnings season is next week.