Recently, Becton, Dickinson And Company increased its dividend by almost 5% to 87 cents a share per quarter. This was the 50th annual increase in a row and the company is now officially a Dividend King. How come this company can maintain profitability for so long?
After a few years of deleveraging after the acquisition of C.R. Bard, Becton, Dickinson And Company seems fairly valued and is set to generate decent returns over the next decade. Since 1990, the company has only once had a five-year negative return.
We start with some brief info about what the company does:
Becton, Dickinson And Company (ticker code: BDX – from now only BDX) was founded in 1897 and is famous for its needles and syringes. After a couple of large acquisitions in 2015 and 2017, the company became more diversified and is now one of the biggest medical and diagnostic equipment manufacturers.
BDX has three business segments: Medical, Life Sciences, and Interventional. It’s the world’s biggest manufacturer and distributor of medical and surgical products like needles, syringes, and disposal units. It has a leading position in almost all of its products. Almost 50% of the sales are international, i.e. outside the US.
Becton, Dickinson And Company’s Medical segment:
The segment makes a broad array of medical devices that are used in a wide range of healthcare providers like hospitals/clinics, physicians, retail pharmacies, governmental and nonprofit public health agencies, pharmaceutical companies, and healthcare workers.
The medical business segment has several business units:
- Diabetes care (Syringes and pen needles for the injection of insulin)
- Medication and Procedural Solutions (Needles, syringes, and intravenous catheters for medication delivery, disposal containers, skin antiseptic products, surgical instrumentation, and generic prefilled injectables)
- Medication Management Solutions (Infusion and management systems)
- Pharmaceutical Systems (Prefilldable drug delivery to pharmaceutical companies)
- Respiratory Solutions (Respiratory ventilation and diagnostics for patient monitoring and anesthesia delivery)
Becton, Dickinson And Company’s Life Sciences segment:
The segment mainly provides diagnostic instruments to detect a broad range of infectious diseases and cancers, such as Covid-19 test kits. The customers are mainly hospitals, laboratories, and health clinics.
This segment has several business units: Preanalytical Systems, Diagnostic systems, and Biosciences.
Becton, Dickinson And Company’s Interventional segment:
The segment is mostly about medical equipment for urology, surgery, and vascular for professional users like hospitals, healthcare centers, etc.
The business segment has three units: Surgery, Peripheral Intervention, Urology, and Critical Care.
For 2020 the three different business segments had the following sales and operating income:
|Revenue||8 680||4 675||3 762||17 117|
|Operating income||2 274||1 405||724||4 403|
Why buy Becton, Dickinson And Company?
If you are looking for a quality company to hold for a long time we believe BDX fits the description nicely. Just look at this:
- A pretty predictable business model
- Operates in the healthcare sector where we can expect a surge in the growth of old people
- More and more people get diabetes 2 (sadly) due to inactivity, overeating, and wrong diet
- Poor lifestyle habits increase demand for BDX’s products
- More and more people can afford healthcare worldwide
- BDX has a “moat” in distribution channels and brands
- Most of the sales come from products where they have a leading position
- Margins have come down a tad over the last five years, but are still high at 46%
- BDX has scale
- Syringes and needles might be commodities, but they will keep track of inflation
We’ll partly touch upon all these arguments in the rest of the article:
Becton, Dickinson’s share price:
BDX has a pretty predictable business model. This is reflected in the share price. Below we have charted the share price with dividends reinvested from 1990 until November 2021 with 100 000 invested (logarithmic scale, read here for logarithmic vs. linear charts and scale):
The second chart, the blue lines, shows the drawdowns along the way. It was a pretty steep drawdown in 1999, but that was mainly due to excessive valuation prior to 1999. The drawdowns in 2008/09 and March 2020 were both substantially less than the market.
The annual returns are like this:
What is remarkable is the many “explosions” in share price performance followed by sideways return and the absence of drawdowns (except 1999).
This performance has resulted in the pretty amazing fact that BDX has only once experienced a five-year negative CAGR. And the ten-year rolling CAGR has compounded like clockwork between 10 and 15%:
The blue line is the 5-year rolling CAGR and the red line is the ten-year rolling returns. As you can see, history has shown that you can’t go wrong if you invested in BDX and held the position for ten or more years. Whether or not that trend continues is unknown, but we believe BDX offers pretty good risk and reward.
Becton, Dickinson’s capital allocation:
As mentioned, BDX is now a Dividend King. The current annual dividend payment is 3.48 USD which equals 1.4% as of November 2021.
Every year BDX makes acquisitions but they are mainly small bolt-ons, but a few years back (2017) C.R. Bard was acquired (ticker code BCR), their biggest acquisition ever.
About 30-50% of the free cash flow goes to serve the dividend. The last two years capital has been used to pay down debt which is now close to the target of 2.5x EBITDA.
The board recently authorized to buy back up to 10 million shares. This is 3.5% of the current outstanding number of shares. BDX doesn’t have a history of many buybacks but did buy back one billion USD of shares at an average price of 242 during the last 3rd quarter (ended June 2021). This was the first buyback since 2017 and the largest amount since 2012.
From what we can see from history, the board and management seem to have a pretty clear idea of when it makes sense to buy back shares. The CEO is new and it seems likely buybacks accelerate.
Becton, Dickinson is partially recession-proof:
Having stocks that have a business model that is “recession-proof” is a great advantage. These stocks can continue compounding from a higher base after a recession.
Besides, you are less likely to make stupid behavioral mistakes. If you are like most investors, you’ll become worried about further losses in a drawdown and be inclined to sell. The less drawdowns, the less likely you are to do irrational decisions.
BDX’ business model is pretty solid and less likely to get disrupted by a recession. Just look at the charts and tables we provided further up in the article and you understand why.
Becton, Dickinson’s valuation:
If we look at the share price it has gone more or less sideways since the summer of 2018, a period of more than 3 years. At the same time, the business is still performing well, so this means the earnings multiple has contracted.
At current prices, around 250 USD per share, the earnings multiple is less than 20. Considering that the market is now trading at record multiples, we believe BDX is one of the better buys in today’s market.
Current multiples are also relatively cheap compared to BDX’s historical valuations. Historically, BDX has traded around 20x or above. The earnings estimates at Seeking Alpha is around 15 USD a share for 2025 which equals a current PE of 15. We believe these are attractive numbers.
Why is Becton, Dickinson most likely a good long-term investment?
We have never been shareholders of BDX, but we recently bought some shares as part of our long-term investments. We are happy to have a recession-proof stock with a pretty predictable business model.
Additionally, if inflation turns out not to be transitionary, BDX should be able to pass on increased costs to its customers. There are not many alternatives to the global healthcare providers.
All in all, this is not a sexy business, but one of the most predictable!
Disclaimer: We are long Becton, Dickinson (BDX). We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinion – they are not suggestions to buy or sell any securities.