Thursday, May 28, 2009

BDX – Stock Analysis for Dividend Growth Portfolio

Becton, Dickinson and Company (BDK) is a medical technology company that serves healthcare institutions, life science researchers, clinical laboratories, industry and the general public. BD operates in three different market segments viz. medical supplies and devices, laboratory equipments, and diagnostic products. BD is headquartered in the United States and has offices in nearly 50 countries worldwide.

BDX is a dividend achiever and has been paying growing dividends for last 10 years. In one of my earlier post, I listed few companies that may have potential for dividend growth investments. I had shortlisted BDX for more analysis. Keeping with that, my objective here is to analyze if BDX is a good dividend growth stock and how it will rate on my scale of risk-to-dividends.

Trend Analysis
Here I am looking at trends for past 8 years of corporation’s revenue and profitability. These parameters should show consistently growth trends. The trend charts and data summary are shown in images below.

  • Revenue: Consistently growing revenue. The average revenue growth for last 8 years is 8.6% (with 2.8% standard deviation).
  • Cash Flows: In general, an increasing trend for operating cash flow (except a dip in year 2006). The free cash flow is generally close to net income.
  • EPS from continuing operation: Consistently growing earnings.
  • Dividends per share: Consistently growing dividends.

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 1.14. This is a low risk category as per my 3-point risk scale.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past five years.

  • Dividend growth rate: The average dividend growth of 16.0% (stdev. 15.7%) is less than average EPS growth rate of 18% (stdev. 12.3%). The dividends seem to be well covered and consistent with earnings growth.
  • Duration of dividend growth: 10 years.
  • 4 year rolling dividend growth rate for past ten years: Less than 10% for past 8 years. More than 12% for last six years.
  • Payout factor: In the past 8 years, it has been in the range of 20% to 30%. There is room for growth in payout factor.
  • Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 2.0%; and (b) MMA yield is 3.4%. Considering the last 8 year average dividend growth rate of 16%, the stocks dividend cash flow at the end of 10 years is 1.65 times MMA income. However, with my projected dividend growth of 8.6%, the dividend cash flow is equal to 0.91 times MMA income. For MMA income to be equal to dividend cash flow, the yield has to be 2.4%, and price has to be at $56.00

Fair Value Calculation
This section determines what price I should pay to buy a given stock

  • Net present value (NPV) price based on 15 year DCF: $46.5
  • Average high yield price calculated based on past 10 years: $67.5
  • Pricing based on past 8 year relative price-to-earnings ratio. $74.7
  • Pricing based on price-to-earnings ratio of 12: $50.7
  • Graham number: $38.2

The range of fair value is calculated as $48.0 to $55.5. This is determined by taking average (for high value) of above five parameters and then subtracting it with half the standard deviation (for low value). This fair value is also very similar to the requirement for MMA income equal to dividend cash flow.

Qualitative Analysis
BDX’s history can be traced back to 1897. It has survived all the major ups and downs in the recent history of United States. This demonstrates that it keeps adapting to changes in the market place.

  • Contrary to widespread belief, my viewpoint is it operates in an industry with high barriers to entry. The quality and reliability requirements for end products in this industry are among the stringent ones. BDX’s has consistently showing that it can meet those requirements in profitable way.
  • Current financial turmoil does not seem to have had a game changing effect on its businesses. The company does not have excessively high debt levels. It does not depend upon the credit markets.
  • BDX generated more than half of its sales from outside of US. This allows individuals investor like me to hedge against dollar decline and exposure to international markets.
  • The area of concern for BDX is the regulatory driven constraints which may change the spending patterns of hospitals and clinics.
  • Another area of concern is recession driven likely reduction in expenditure from community hospitals and other life science customers.
  • Like any other company, I expect BDX to face short-to-intermediate term challenges due to recession driven slow down.

Conclusion
BDX is a dividend achiever and has been raising dividends for last 10 years. The stocks current risk-to-dividend rating is 1.14 (low risk). This is a low yield dividend stock with dividend cash flow being equal to MMA cash flow after 10 years (at price of $56). This analysis shows that BDX continues to be a good stock for potential dividend growth investment. I will be willing to open a long position when the stock prices falls within my fair value range.

Full Disclosure: No position at the time of writing. I may initiate a long position in near future.

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