-Becton Dickinson is a global health company that focuses on durable medical supplies.
-Six year earnings growth: 14.5%
-Five year dividend growth: 16.5%
-Low debt, low earnings multiple, great value, price depressed due to political uncertainty.
-In my opinion, BDX would make a great addition to a portfolio as long as the share price remains under or dips below $79.
Dividend Monk Rating: A-
Becton Dickinson is a truly global health company. Founded in 1897, and employing 29,000 people, Becton Dickinson develops, manufactures, and sells a wide range of medical devices and instruments. Revenue for 2009 was $7.16 billion. Becton Dickinson is currently organized into three main segments.
BD Medical contributes by far the largest percent of revenue, with $3.731 billion or roughly 52% of Becton Dickinson’s total revenue. A little over half of this, or slightly under $2 billion, comes from medical and surgical systems. Slightly under $1 billion comes from pharmaceutical systems, and the remainder comes from diabetes care and Ophthalmic care. These products come in the form of needles, syringes, drug-delivery systems, and surgical blades, and the major customers are hospitals, clinics, physicians’ offices, government agencies, and healthcare workers.
BD Diagnostics pulls in the second largest amount of revenue, with $2.226 billion or roughly 31% of BD’s total revenue. It is about evenly split up, with over $1 billion in revenue each from Preanalytical Systems and Diagnostic Systems. This segment is all about specimen collection, identification, testing, and specific systems, and the major customers are hospitals, laboratories, blood banks, physicians’ offices, and so forth.
BD Biosciences is the smallest segment, with $1.2 billion in revenue. From this, close to $1 billion comes from cell analysis, and the remaining $300 million comes from discovery labware. The products are mainly kits for cell analysis, cell imaging systems, and laboratory products.
Over 55% of revenue comes from outside of the US.
Revenue, Earnings, and Cash Flow
Earnings from 2009 were $1.231 billion, which is an 8.7% rise over 2008. Revenues increased to $7.16 billion in 2009, which is only an increase over 2008 of 1.2%, but is a 5% increase on a currency neutral basis. This is impressive considering the instability of the economy through the year. The 2009 Annual report shows that BD experienced double digit revenue growth from Asia and South America.
Throughout 2009 BD repurchased $550 million in shares, which led to a total of 11.3% earnings-per-diluted-share growth. Earnings and revenue growth are extremely favorable in all recent years besides the recent 2008-2009 transition.
From 2004 to 2009, that’s an annual revenue growth rate of 8.3%.
From 2003 to 2009, that’s an annual earnings growth rate of 14.5%.
(Due to the low year in 2004, I prefer in this case to calculate the 6-year earnings growth rate instead of the 5-year earnings growth rate to make the assessment more conservative and accurate. The 5-year earnings growth rate from 2004 to 2009 is over 21% due to the low year in 2004.)
For this company, earnings are an adequate representation of cash flow. Total cash flow was $1.692 billion in 2009 compared to $1.073 billion in 2006. That’s an annualized cash flow growth of 16% for those three years.
Gross margins were 52.6% in 2009, up from 50.4% in 2004 and 48.6% in 2000.
Return on Equity is an impressive 24% currently, and has been near or over 20% for the last ten years. Debt to Equity ratios (discussed later) are very reasonable as well, so the ROE is a legitimate metric here.
As can be seen, BDX is a great dividend growth stock in good times, and is able to be a defensive, medium-growth stock even in the worst of times, likely due to its diverse business segments and vast international exposure.
My tactic is mainly to invest in dividend stocks, so the dividend is a key part here. The above 5-year growth is impressive considering the size of the company and the economic environment, but the increasing dividends have made a large difference as well.
Dividends increased at an annualized rate of 16.5%. The yield going into 2010 is about 2%, the highest it’s been in at least five years.
Although the dividend yield is mediocre, the dividend growth is what I’m really looking at here. 16.5% annual dividend growth is impressive, especially considering that revenue and earnings are both improving, and the current earnings payout ratio is only 27%. This leaves tremendous dividend growth potential for the long run. BDX has increased its dividend for the past 37 years, including the latest difficult year by 12%. This wouldn’t be a good pick for current income, but should prove to be a great pick for dividend reinvesting and people with a lot of time for compounding.
BDX’s balance sheet is strong. With $9.3 billion in total assets and $4.2 billion in total liabilities, BDX is appropriately and safely leveraged. The quick ratio is 1.8 and the current ratio is 2.6. Long Term debt to equity is 0.29, and total debt to equity is 0.37.
Book value per common share has increased from $7.72 in 2000 to $21.69 in 2009.
Like any company, Becton Dickinson has risks. Due to its size, BDX faces international political issues and lawsuits. Due to potential of healthcare reform, BDX faces the possibility of reduced profit margins, but is partially shielded by its vast international exposure, comprising 55% of its revenue. Diverse revenues are key here, and a pillar of stability for the company. BDX has revenue streams from a number of different countries, and no single customer contributed more than 10% of revenues. BDX is dependent in some aspect on Research and Development, having spent $400 million in 2009. Currency risk is an issue, and was certainly an issue in 2009 as it played a large part in the slow revenue growth that the company experienced.
Conclusion and Valuation
BDX is a core holding of my portfolio. The risk/reward ratio is outstanding based on its growth and stability, and so this company is spectacular for a reasonably safe, long-term pick. With over 16% 5-year dividend growth on a current 2% yield, 14.5% 5-year earnings growth, and share buybacks, BDX has been a very shareholder friendly company. It is appropriately leveraged, and draws the majority of its revenue internationally.
I think the macro environment is well in place to support BDX. Developing countries are increasingly demanding adequate healthcare, and the US has an aging population. This is a great way to be involved in the healthcare industry without being involved with the risky pipelines and patent loss issues of big pharmaceutical companies. I’m impressed by its ability to steadily grow during healthy economic periods and quietly persevere during terrible economic environments.
All of this comes at a modest P/E of 15.3 right now, and as previously mentioned, the dividend yield is the highest it has been in the last several years. Over the past five years, BDX has had its P/E range from 11.6 to 24.3, so it is historically undervalued, based on both P/E and dividend yield. Due to both long-term growth and stability, as well as the solid and growing dividend, I would purchase this stock with a margin of safety as long as the earnings multiple remains at 16 or below. So for me, the stock is attractively valued as long as it remains under or dips below $79.
Full Disclosure: Long BDX
You can see my full list of individual holdings here.
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