The company’s last dividend increase was in November 2012 when the Board of Directors approved a 10% increase to 54.50 cents/share. The company’s peer group includes Medtronic (MDT), Baxter International (BAX) and St. Jude Medical (STJ).
Over the past decade this dividend growth stock has delivered an annualized total return of 12.40% to its loyal shareholders.
The company has managed to deliver an 8.70% average increase in annual EPS since 2004. Analysts expect Becton Dickinson to earn $6.26 per share in 2014 and $6.84 per share in 2015. In comparison, the company earned $4.67/share in 2013. The company’s earnings were reduced by a one-time charge of $1.06/share related to a lawsuit filed against the company by Retractable Technologies.
Becton Dickinson has also managed to repurchase plenty of shares over the past decade, bringing the number of shares from 263 million in 2003 to 200 million in 2013.
Becton Dickinson operates in three segments:
Medical (Over 50% of sales)
BD Medical produces a broad array of medical devices that are used in a wide range of healthcare settings. The primary customers served by BD Medical are hospitals and clinics; physicians’ office practices; consumers and retail pharmacies; governmental and nonprofit public health agencies; pharmaceutical companies; and healthcare workers.
Diagnostics (almost one third of sales)
BD Diagnostics provides products for the safe collection and transport of diagnostics specimens, as well as instruments and reagent systems to detect a broad range of infectious diseases, healthcare-associated infections (“HAIs”) and cancers. BD Diagnostics serves hospitals, laboratories and clinics; reference laboratories; blood banks; healthcare workers; public health agencies; physicians’ office practices; and industrial and food microbiology laboratories.
Biosciences (Approximately 14% of sales)
BD Biosciences produces research and clinical tools that facilitate the study of cells, and the components of cells, to gain a better understanding of normal and disease processes. That information is used to aid the discovery and development of new drugs and vaccines, and to improve the diagnosis and management of diseases. The primary customers served by BD Biosciences are research and clinical laboratories; academic and government institutions; pharmaceutical and biotechnology companies; hospitals; and blood banks.
I like the fact that almost half of revenues is derived from items that are essential and disposable, and which creates the need for customers to repeatedly keep buying more syringes and needles to name a few. I like that the Diagnostics segment is also characterized by recurring revenue streams, as the customers would face high switching costs if they move to another competition. Becton Dickinson’s scale allows it to compete effectively in the Medical segment.
Becton Dickinson should be able to generate higher sales in due to the sustainable demand for its diabetes products, disease testing products, and cell analysis products. The company generates almost 60% of its sales from international operations, which is expected to increase as it grows its presence in emerging markets. Becton Dickinson is also active on the acquisition front and is investing heavily in research and development, which should benefit the company through new product launches. Becton Dickinson has a solid long-term potential for its business, due to its strong position and due to the bullish prospects for its industry. The company enjoys strong demand for its products and a more favorable pricing than other competitors in its industry.
While the company is expected to face higher costs by $55 million from the implementation of the new medical device tax in 2013, it should be able to benefit from increased healthcare spending in the US and internationally.
The return on equity has remained high above 20% over the past decade. I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 16.80% per year over the past decade, which is higher than the growth in EPS. The past three dividend announcements were for a hike of 10% in dividends each time. Going forward, I would expect dividend growth to closely approximate 10%.
A 10% growth in distributions translates into the dividend payment doubling every seven years on average. If we look at historical data, going as far back as 1975, one would notice that the company has actually managed to double distributions every six years on average.
The dividend payout ratio has increased from 27% in 2004 to 42% in 2012. This is a short-term spike, caused by one-time accounting items discussed above. On a forward 2014 earnings basis, the dividend payout ratio is approximately 35%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently Becton Dickinson is attractively valued at 17.40 times forward earnings, yields 2% and has a sustainable distribution. I recently initiated a small starter position in the stock. I find it much easier to monitor a company I am interested in, if I have some skin in the game. As a long-term dividend investor in the accumulation stage, I get excited if the companies I am interested in are on sale, because I get to buy more shares with my limited amounts of capital. Although this price is a low probability event, I plan on adding to my position on dips below $88/share, equivalent to an entry yield of 2.50%.
Full Disclosure: Long BDX and MDT
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