Becton Dickinson Dividend Stock Analysis

Slowing Growth for the Becton Dickinson Dividend

Becton Dickinson (also known as “BD”) has a long history as a dividend growth stock.

With an emphasis on dividend growth.  Rather than the current dividend yield.

But recently, dividend increases have been noticeably small.  As a result, let’s investigate what is going on.

So join me for a dividend deep dive of this high-quality health care company.  Certainly, I will have some thoughts on the recent Becton Dickinson dividend growth, safety, and much more.

Furthermore, BD is a holding in the Dividends Deluxe model portfolio. Be sure to check out some of the other dividend stocks in the model portfolio.

And finally, for quick navigation, each company in the model portfolio is linked to its most recent dividend stock analysis.

Becton Dickinson Company Background

BD is a global medical technology company.

They are engaged in the development, manufacture, and sale of a broad range of health care products. These products include medical supplies, devices, laboratory equipment, and diagnostic products.

Their products are used throughout the healthcare industry. Customers include hospitals, doctors, life science researchers, clinical laboratories, the pharmaceutical industry, and the general public.

Finally, Becton Dickinson stock trades on the New York Stock Exchange under the stock ticker symbol BDX.

Source: Becton Dickinson – About The Company

Becton Dickinson Business Segments

BD’s operations consist of 3 worldwide business segments:

• Medical – Medical devices & related technologies
• Life Sciences – Diagnostic testing & the study of diseases
• Interventional – One-time use surgical & specialty devices

Revenue breaks down by segment as shown in the chart below:

Growth Strategy

In recent years, BD has made 2 large acquisitions: Care Fusion and C.R. Bard. The company continues the process of integrating and realizing the synergies from these mergers.

The C.R. Bard acquisition brought with it the move into the interventional business segment. This segment has higher growth potential than the more mature medical and life sciences segments. But also requires higher spending on research and development to fuel that growth.

Becton Dickinson Dividend Yield

BDX stock pays an annual forward dividend of $3.16 cents per share.  This gives us a 1.1% Becton Dickinson dividend yield at the recent BDX stock price.

Becton Dickinson Dividend Growth Rate

1 Year	3 Years	5 Years	7 Years
2.6%	2.7%	5.7%	6.9%

As illustrated in the chart, dividend growth has slowed.  Furthermore, the company recently increased its dividend for 2020 by just 2.6%.

The 2020 dividend increase is identical to the prior year. In fact, BD’s last 3 annual dividend increases have been the same. Specifically, 2 cents per share added to the quarterly payout.

Consecutive Years Of Dividend Growth

Becton Dickinson has increased its dividend for 48 consecutive years.

This record makes BD a Dividend Aristocrat. Dividend Aristocrats are those companies that have increased their dividends for at least 25 years in a row.

Becton Dickinson Revenue Trend

Revenue growth has accelerated rapidly in recent years.  The growth is mainly due to acquisitions.

In 2015 BD acquired CareFusion for $12 billion.  And then in 2018, they acquired C.R. Bard for $24 billion.

Becton Dickinson Dividend, Earnings & Payout Ratio

Due to the aforementioned acquisitions, BD’s accounting earnings are complex and challenging to interpret.  They include many non-cash charges related to the acquisitions.

Those charges cloud the underlying business fundamentals.  As a result, the company chooses to report an adjusted earnings number.

Adjusted earnings are shown in the chart above. These numbers are reported outside of the company’s financial statements.

Certainly, the dividend is well covered. It consumes only 25% of adjusted earnings per share.

However, I’m always a little skeptical when a company reports large adjustments to their accounting earnings.  So let’s double-check the dividend coverage against free cash flow.

Cash is cash. It can not be adjusted.

And after all, our dividends are paid from cash. And there are no complex accounting adjustments to interpret.

Becton Dickinson Free Cash Flow & Dividends Paid

Once again, the dividend payout ratio checks out fine at about 40% of free cash.  So, the dividend appears well covered by cash flow.

A lower dividend payout ratio is generally better.  It shows the company has ample room to raise the dividend in the coming years.  Or, withstand an earnings drop without having to reduce the dividend.

Finally, the company used its remaining cash during 2019 to reduce debt.

Financial Position

Speaking of debt, let’s look at the balance sheet. I judge a company’s financial position by looking at their capital structure.

A company’s capital structure is the combination of debt and equity used to purchase the assets required to run the business. Do they finance their business with large amounts of debt? That can be a bad sign if the company runs into financial difficulties.

However, debt to equity checks in at a reasonable level. It is .92 to 1.

Becton Dickinson Credit Rating

Knowing a company’s credit rating is important.  Furthermore, it is critical when a company needs to borrow money to fund its operations.

A corporation’s credit rating is similar to how your personal credit score works.  Higher ratings mean lower risk to those who lend the company money.  Also, higher ratings mean lenders will be more likely to get their loans paid back.

So it is a good idea to check out a company’s creditworthiness as measured by its credit ratings.

BD has a credit rating that indicates moderate to substantial credit risk.

The ratings are provided by two of the big rating agencies: Moody’s (Ba1) and S&P (BBB) as indicated in the chart above. Furthermore, the ratings are lower than ratings of other high-quality dividend-paying companies.

Why? Because BD took on more long term debt to finance the C.R. Bard acquisition.  Also, they issued shares of stock in exchange for cash from the public.

The additional debt has pressured the companies credit rating.  The additional shares outstanding have required the company to pay more in dividends to the new shareholders.

In my opinion, these factors caused the company to reduce it’s recent dividend increases to conserve cash. And protect its credit rating from decreasing any further.

Dividend Increases & Acquisitions Do Not Always Mix Well Together

Here is my issue from a dividend growth investor’s perspective...

Dividend growth has taken a back seat to acquisitions and the need to finance those acquisitions.  Hopefully, this will be temporary and dividend increases will return to past levels as the company integrates, grows and benefits financially.

So I will be patient and give this company and its management the benefit of the doubt for the time being. The business fundamentals and dividend metrics still look strong to me.

Becton Dickinson Dividend Safety

I base my evaluation of dividend safety based on a number of factors discussed so far. They include:

• Business fundamentals
• Dividend payout ratios
• Credit ratings
• Financial position

The low credit ratings give me a reason to pause. However, I believe the Becton Dickinson dividend is very safe from a potential reduction for the foreseeable future.

Becton Dickinson Dividend Growth Projection

In order to plan for the income from my dividend stocks, I make a dividend growth forecast for each one of my holdings.

The forecast is based on:

• Historical dividend growth
• Dividend payout ratios
• Stated dividend policy when management provides one
• Business fundamentals
• Growth strategy

Usually, it is easy to come up with a reasonable dividend growth projection. But, Becton Dickinson is a more difficult situation.

Why? Because until the last 3 years, BD has increased its dividend much more rapidly.

I have to ask myself if the company will return to higher dividend growth. Or, remain with 2-3% annual increases.

My conclusion? Well, it may take another year or two, but I believe dividend growth will return to a higher level. 8-9% annually, in my opinion.

Increases in health care spending and higher profits from acquisition savings will support this level of dividend growth. Also, the company expects to have more free cash at their disposal starting in 2021 as shown in the graphic below.

Source: J.P. Morgan Health Care Conference

Becton Dickinson Stock Valuation

Becton Dickinson’s stock price has increased rapidly over the past 7 years. So let’s check valuation using a couple of different methods.

Dividend Discount Model

The single-stage dividend discount model takes into account several factors we have discussed so far.

• The current annual dividend payment – $3.16 per share
• Projected annual dividend growth – 8.5%
• My desired annual rate of return – 10%

Using these assumptions, the dividend discount model calculates the fair value of Becton Dickinson’s stock at $229 per share.

Stock Price To Earning Ratio

The 2020 forward price to earnings stands in the low 20’s.

This represents a premium to the S&P 500’s 18 times 2020 earnings. Based on this measure, the stock looks over-valued.

A lower price to earnings ratio typically represents a better value for the investor.

Morningstar Fair Value Estimate

The investment analysis firm Morningstar believes the fair value of BDX stock to be $296 per share.

Stock Valuation Conclusions

Becton Dickinson’s stock looks overvalued to me based on its price to earnings ratio and dividend discount model valuation. In contrast, BDX stock has recently been trading below Morningstar’s fair value estimate.

Becton Dickinson Dividend Stock Analysis Wrap Up

With the aggressive acquisitions in recent years, BD has turned into an atypical dividend stock.  Its low dividend yield and slowing dividend growth are not particularly appealing to me as a dividend stock investor.

Right now, I look at BD as a growth company. And BDX stock happens to pay a dividend.

Not your typical dividend stock, but I am okay with that for now. The dividend appears safe and I believe it will grow more rapidly in the future.

BD holds a smaller size position in my dividend stock portfolio.  I will hold on but do not intend to add to the position at this time.

Related dividend stock reviews in the health care sector:

Medtronic

Abbott Labs

Abbvie

Johnson & Johnson

Disclosure & Disclaimer

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I own Becton Dickinson stock and collect the Becton Dickinson dividend.