In the 18th installment of my 54-part Dividend Aristocrats in Focus series, I analyze the operations, growth prospects and competitive advantage of medical instruments and supplies manufacturer Becton, Dickinson & Company (BDX, Financial). BDX was founded in 1897 and has increased its dividend payments for 42 consecutive years. The company’s business units are examined in the section below.
Business overview
BDX operates in 3 business segments. Each segment is listed below along with the percentage of revenue it generated for the company through the first 3 quarters of fiscal 2014:
- Medical: 54% of revenue
- Diagnostic: 32% of revenue
- Biosciences: 14% of revenue
The medical segment provides hospitals and health care providers with various medical devices. Devices supplied include needles, syringes, catheters, prefilled drug delivery systems and disposal containers. BDX’s medical segment sells medical products that are disposed of and must be repurchased, creating repeat orders.
The diagnostic segment sells products used for the collection and transport of diagnostic specimens, as well as products designed to test for and identify various bacteria, virus, and cancers. The unit is the second largest for the company based on revenue, behind the medical segment.
The biosciences segment provides diagnostic and research tools to various medical research businesses and institutions. The segment is the smallest of BDX’s three segments, and generated 14% of revenue for the company through the first three quarters of fiscal 2014.
There are many Fortune 500 companies that talk about being global. BDX is truly a global business. Nearly 60% of its revenue is generated internationally. The company has long had a worldwide growth focus. The company’s broad vision has given it relatively strong growth for a company that was founded in the 1800s.
Competitive advantage
BDX’s competitive advantage comes from its global reach, strong supply lines and well-established relationships with customers and governments. It would be very difficult for new entrants into the health care market to recreate the distribution network and connections that BDX has.
Aside from its well established distribution network, the company also has a long history of innovation. The health care industry is rapidly evolving as new technology enables better research, deeper insights, and more treatments and cures. BDX has a strong research and development department coupled with a robust product pipeline. The company’s ability to generate revenue from innovative new products and market them through its established distribution network is a competitive advantage that continues to grow the company. The image below shows the new products the company has planned for this year and next year, broken down by operating segment.
Source: 3rd Quarter 2014 Presentation
Growth prospects
BDX has recently announced two acquisitions that should add to the company’s growth going forward. The first of these is the CareFusion (CFN, Financial) acquisition. On October 5, BDX announced it will acquire CareFusion for $12.2 billion. The deal is expected to close in the first half of 2015, pending regulatory approval. BDX expects the deal to be accretive on a cash-flow basis in the first year of the acquisition, and accretive to GAAP EPS by 2018. The deal will give BDX’s medical segment access to a variety of complimentary medication dispensing products to market through its strong international distribution network. CareFusion currently generates 75% of its revenue in the U.S. With BDX’s international experience, it can rapidly grow the CareFusion product portfolio by expanding internationally. The image below breaks down the revenue by geography for each company. The takeaway is the large opportunity BDX has to market CareFusion’s products on a global scale.
Source: BDX CareFusion Presentation
The second recently announced acquisition for the company is the GenCell Biosystems acquisition. GenCell Biosystems is a privately held Irish company that has developed proprietary technology for preparation of Next Generation Sequencing of genotypes. Next Generation Sequencing greatly speeds the process of analyzing and sequencing DNA. It has practical applications for genotyping in agricultural applications. The acquisition will not be immediately accretive to earnings and is a long-term strategic move for BDX to enhance its next generation portfolio.
Shifting our focus to financial data, BDX has seen rapid growth this year. The company has grown emerging market revenue 12% year over year, including 20% growth in China. The company’s global presence is not all talk; BDX is growing rapidly internationally. Emerging market revenue makes up nearly 25% of the company’s total.
Going forward, I expect BDX to continue growing emerging market revenue in double digits. The company has set up its sales and distribution channel and has proven it can continuously innovate new products. The company will continue to benefit from rapid health care spending growth in emerging markets in general, and China in particular.
Dividend analysis
BDX currently has a dividend yield of 1.7%, which is below many dividend aristocrats. The company has excellent growth prospects which make up for its relatively lower dividend yield. Over the last decade, BDX has increased its dividend payments at about 13% a year, while earnings per share have grown at around 9.3% a year. I expect the company to continue growing its dividend payments at double digit rates for the next several years. The company has a low payout ratio of about 35%, giving it plenty of room to grow its dividend payments faster than earnings per share for several years.
Valuation
BDX has a PE ratio of about 20 (data from Value Line), which is a bit higher than the overall market PE ratio of about 18.5. Over the last decade BDX has traded at a PE ratio of about .97x the S&P 500’s PE ratio. BDX has much better growth prospects than the overall market, coupled with a long history of rewarding shareholders with dividend growth and a proven innovation pipeline. The company is an extremely high quality business. I cannot understand why it has not traded at a premium multiple to the S&P 500 over the last decade. I believe the company should trade at a 1.2x premium to the overall market. Based on current market prices, this gives BDX a fair PE multiple of 22.2. If the market reverted to its historical average PE multiple of about 15, BDX fair value would be 18. I believe the long-term fair value of the company to be trading at a PE multiple of around 18. The company is currently trading at a discount to where a high quality business should trade based on current (inflated) market levels.
Recession performance
BDX is nothing if not stable. The company has increased its earnings per share every year dating back to the 1990’s. BDX’s underlying operations performed extremely well during the Great Recession of 2007 to 2009. The company’s earnings per share, revenue per share, and dividends per share increased every year of the Great Recession.
BDX sells its products to health care providers who must by medical products no matter the economic environment surrounding them. Health care has historically been recession resistant. The increased socialization of health care in the developed world will only make the industry more resistant to recessions as governments absorb health care costs instead of individuals who are harder hit by recessions.
Final thoughts
BDX is a high quality business operating in the growing health care industry. The company has a long history of rewarding shareholders. It does not appear to be significantly overpriced despite its excellent growth prospects and shareholder friendly attitude. As a result, the company is a Top 10 stock and buy based on the 8 Rules of Dividend Investing.
