Dividend Growth Stock Investing
Becton, Dickinson & Co. (BDX) is a healthcare company operating in three segments. The medical segment manufactures a variety of medical devices and accounted for 53% of 2012 sales. The diagnostics segment provides products for the safe collection and transport of lab specimens as well as tools used to detect infectious diseases and cancers. The diagnostics segment accounted for 33% of 2012 sales. The biosciences segment produces research and clinical tools that help in the study of cells. This last segment accounts for 14% of 2012 sales. The healthcare industry is a profitable industry to be in allowing Becton Dickinson to pay out annually increasing dividends for the past 41 years. With the aging population healthcare stands to continue being a very lucrative industry to be in.
Dividend Growth and Current Yield
Becton Dickinson currently pays a dividend of $0..495 per quarter for a $1.98 annual dividend. At the close of market on Friday, March 8, BDX’s price per share was $88.84. This gives the stock a current dividend yield of 2.23% (1.98/88.84). Typically I look for a dividend yield of at least 2.5% so I would prefer a higher initial dividend yield from BDX.
In 2003, Becton Dickinson payed an annual dividend amount of $0.40 per share. The dividend trend has been up each year as it now pays $1.98 annually per share. This gives BDX a 10 year annual compound dividend growth rate of 17.34%. More recently the annual dividend growth rate was 9.76% for 2011 to 2012 and 10% from 2012 to 2013. 
This is a good rate of dividend growth for shareholders to enjoy. Becton Dickinson has shown a commitment to it’s shareholders with over 4 decades worth of dividend growth. As long as the dividend rate continues to rise at a rate faster than inflation, investors should be pleased.
Earnings Per Share Growth
Becton Dickinson had a 2002 earnings per share (EPS) of $1.79 and a 2012 EPS of $5.37. Over the 10 years their earnings per share have been consistently climbing upward at a strong rate. BDX has had a 10 year EPS growth rate of 11.61% which is a great growth rate. More recently Becton Dickinson’s annual EPS growth rate was 13.77% from 2010 to 2011. Unfortunately for investors, BDX had a decrease in EPS from 2011 to 2012 but analyst expectations are earnings will rebound going forward to 2013 and beyond. EPS growth has been really good over the past decade for BDX. While it is a little concerning to see a decrease in the most recent year I would expect BDX to turn things around and continue their strong growth going forward.
Net Income Growth
Net income has shown the same pattern as EPS from 2002 through 2012. Net Income was 480,000,000 in 2002 and grew to 1,125,000,000 in 2012. This gives BDX a compound annual net income growth rate of 8.89%. More recently BDX had a net income growth rate of 7.29% from 2010 to 2011 and again a decrease from 2011 to 2012. BDX has maintained a good growth of net profits over the past 10 years. Again analysts expect growth to pick back up after 2012′s down year.
Sales Growth
Sales have been growing for Becton Dickinson over the past 10 years in a consistent uptrend. The compound annual growth rate of sales revenues was 6.69%. An astute investor will notice that sales growth is slower than both net profits and earnings per share growth. This is of concern for investors because it most likely means that EPS and net profits growth will slow going forward. It appears management has done a good job increasing profit margins of the business allowing the company to grow profits at a faster rate than sales. Unfortunately there will come a time when profit margins can no longer be improved and BDX will most likely see a slow down of profits growth. Therefore, I would suggest owners of BDX not to expect double digit growth in earnings going forward from Becton, Dickinson.
Outstanding Shares
Generally I like to see a decreasing trend or at least a consistent balance in the number of outstanding shares of the company. Since 2000, BDX’s outstanding share count has been decreasing every single year. Over the past 10 years the company has decreased shares outstanding by roughly 50 million. With less shares outstanding, the value of each share still available increases. When a company decreases the number of shares available it means the shares I own will have rights to a greater portion of the companies profits. I like seeing that management has shown a commitment of purchasing back shares and increasing current owners percentage of the company.
Return on Equity Trend
When evaluating a company I look for return on equity to be consistently above 12%. Becton Dickinson has had a nice return on equity near or above 15% over the past decade. Maintaining a consistent return on equity shows me that management is doing a good job with shareholders investment. Actually it appears that over the past decade, management has been able to slightly increase the return on equity for the company.
Current Ratio
Current ratio measures a companies ability to meet short term obligations. Becton Dickinson has a 2011 FYE current ratio of 2.56. This means that current assets will be able to cover 256% of current liability obligations. I generally want to see this number be above 1 which BDX has no problem with. The company will have no problem meeting current liability obligations.
Net Profit to Long Term Debt
This number tells me how many years worth of profits it will take to pay off the current long term debt of the company. I like looking at this metric because it gives me an idea of whether the company has taken on too much debt or not. Generally I look for this number to be less then 5 meaning if the company used all their earnings over the next 5 years they could wipe out all debt. For BDX this net profit to long term debt ratio stands at about 2 for 2011. This means Becton Dickinson would be able to pay off all long term debt with about two years worth worth of profits. In my opinion Becton Dickinson does not have too much debt on their balance sheet.
Dividend Payout Ratio
The dividend payout ratio measures the dividend per share compared to the earnings per share. How much of a companies earnings per share are they paying out to shareholders in the form of a dividend. The past few years BDX has maintained a dividend payout ratio around 25-30%. This tells me that Becton Dickinson is paying out around 30% of profits to shareholders and keeping 70% of profits to grow the company and increase shareholder value through share repurchases. I like this payout ratio because it is fairly low and I don’t believe Becton Dickinson should have any trouble maintaining dividend growth in the future even if the company faces struggles near term.
Price/Earnings Ratio
The P/E ratio is a metric I look at to determine if a companies current stock price is too high or within reason. With the most recent closing market price of $88.84 and most recent EPS of $5.37, BDX has a current P/E right around 16.5. Typically the market P/E average is right around 14 so compared to the market in whole I might determine BDX to be slightly over valued. Given the expected slower future growth of BDX, I would say the market is pricing Becton Dickinson a little too high at the current moment.
Looking at GIS’s past P/E ratios of the last few years it looks like they have ranged from a high of 25 to a low of 12. The current P/E of 16.5 is at the low end of the range of 12 to 25 which is the range of P/E BDX has traded the majority of time over the past decade. This could be a chance to get in at a valuation in the lower range that the market usually values BDX.
Return Projections
BDX had EPS of $5.37 in 2012. The past earnings per share growth rate has been roughly around 11% but we calculated a slower growth rate in sales. Therefore I am going to use a more conservative EPS growth rate of 8% over the next 10 years to figure out what 2022 EPS might look like. This gives me an estimated EPS of $11.59 for BDX in 2022.
If BDX is trading at reasonable P/E ratio of 15 in 2022 then it will have a market price of $173.85/share (11.59*15). This will give me an estimated annual growth rate for Becton Dickinson of 7.74% over the next 9 years. If you would be happy with a 7.74% return over the next 9 years as well as collecting increasing dividends along the way then BDX may be a good investment for you. This is a very rough exercise based on growth estimates that may not come to reality. Actual returns in BDX will vary depending on how well the company increases their earnings and how the market values BDX in the future.
Recommendation
Based on the above analysis I believe Becton Dickinson to be a hold at current levels. I think the addition of Becton Dickinson to a dividend growth portfolio would provide a solid blue chip company that is an industry leader in the healthcare industry. If you really want to own this company then I would think today’s valuation is a good entry point. However, given the slower growth rate of sales by BDX, I do not feel they would be anything more than an average performer in any portfolio over the next few years at current valuations. This is why I give BDX a hold recommendation. They can provide a solid foundation to dividend growth portfolios but I wouldn’t expect anything more than average returns from owning this company.
Do you have an opinion on Becton Dickinson? Please share your thoughts in the comments below!
Disclosure: I do not own any shares of BDX.
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6 Responses to Becton Dickinson Dividend Stock Analysis
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I would love to own BDX and missed the last dip that the share price took. The starting yield is a little low for my liking but as long as the DG stays elevated it can make up for it.
JC I agree BDX would be a good company to own long term. I’d like a lower initial price which is why I’m holding out for now.
I’ve started giving more thought on starting dividend yield compared to expected growth and how different types of dividend growth stocks (low starting yield, high growth vs. high starting yield, low growth) could be beneficial to different investors at different stages in their lives. For instance, those at or near retirement may be looking for the higher income while those just starting out have a very long time for the compounding of the high dividend growth to work miracles in their favor.
Nice analysis Dan. I would agree on your conclusions about this stock. I wouldn’t buy it at this level either and I also do not like the yield. I want it at least at 3%. There is a bunch of other stocks to own with such a yield. After I own them all, I might consider adding stocks with lower yield. I like the dividend growth rate of the stock though.
Thanks for your comments Martin. I agree if you prefer a yield above 3% then there are plenty of other great choices for investment. Personally I like to have a mix in my portfolio of stocks with higher current yield but usually lower growth along with a group of stocks with lower initial yield but higher growth. Not really sure if there is a definative answer as to which is better for sure though.
I was fortunate enough to purchase BDX on the last correction and have been happy ever since. Actually I’m kicking myself for not purchasing more shares. Great analysis, very similar to what I found.
Congrats on getting some shares at a decent price Marvin! I look forward to the next market correction when I can pick up some of the companies I’ve been eyeing for awhile like BDX.