In this five-part series, we will provide five picks for the highest quality dividend growth stocks in the S&P 500. The five dividend stocks examined in this series have a unique mix of characteristics, explains Ben Reynolds, editor of Sure Dividend.
First, they are all Dividend Aristocrats. The Dividend Aristocrats are a group of 65 stocks in the S&P 500 Index, that have each increased their dividends for 25 years in a row or longer. Another attractive quality of our top five Dividend Aristocrats is that they outperform the broader market during recessions, with lower volatility.
Lastly, they have the ability to pay (and raise) their dividends each year, even during economic downturns or crashes in the stock market. The first stock in the five-part series is medical device manufacturer Becton Dickinson & Company (BDX).
Business Overview & Recent Events
Becton, Dickinson & Company is a global leader in the medical supply industry. The company was founded in 1897 and has grown into an industry giant that operates in 190 countries. The company generates more than $19billion in annual revenue, with approximately 45% of revenues coming from outside the United States.
Today, BDX operates three segments: Medical Devices, Life Sciences, and Intervention. The Medical Devices segment products supplies such as needles for drug delivery systems, and surgical blades.
The Life Sciences division makes products for the collection and transportation of diagnostic specimens. Lastly, the Intervention segment includes several products made by C.R. Bard, which BDX acquired in 2017 for $24 billion.
BDX has continued to perform well over the past year, despite the impact of the coronavirus pandemic on the global economy. In the most recently reported quarter, BDX grew revenue by 15% compared with the same quarter last year.
The Medical segment grew revenue by 4.7% to $2.3 billion, which continues to be driven by the Medication Delivery Solutions business. Meanwhile, Life Science revenue grew 38% as biosciences grew double-digits due to a recovery in lab activity. Lastly, Interventional revenue was flat at just over $1 billion.
This was a strong and balanced performance, with each major segment reporting at least flat sales, or strong growth particularly in the case of the Life Science business.
BDX also showed balanced growth across its geographic markets. The U.S. grew 1.9%, while international markets revenue grew 26%. On the bottom line, BDX’s adjusted earnings-per-share increased 25% to $3.19 for the quarter.
The company continues to execute on its strategic priorities, and as a result should continue to generate strong revenue and earnings growth in the years ahead.
Growth Prospects
Along with providing quarterly financial results, the company reaffirmed its guidance for fiscal 2021. BDX management expects adjusted EPS in a range of $12.75 to $12.85. Revenue is projected to grow 10% to 12% for fiscal 2021, on a currency-neutral basis.
Overall, 2021 is expected to be another year of solid growth for the company, thanks to two key growth catalysts: the aging population, and growth in emerging markets.
First, many developed nations such as the U.S. have aging populations. For example, the Baby Boomer generation in the U.S. is a large cohort, meaning demand for healthcare products and services is only going to rise moving forward. This presents a major fundamental tailwind for BDX that will fuel its domestic growth.
Second, international expansion is a key growth catalyst for BDX, particularly in the emerging markets that are growing their economies at a higher rate than the developed markets.
For example, in the most recent quarter BDX’s international growth was fueled primarily by under-developed nations. Of the company’s 26% international revenue growth, developed nations grew 10% while emerging markets revenue increased by 24%, including 62% growth in China.
Capitalizing on these two catalysts should drive BDX’s long-term revenue and earnings growth, made possible by the company’s huge footprint and global competitive advantages. BDX spends over $1 billion each year on research and development to further entrench itself as a market leader.
This investment in R&D has paid off for the company, as BDX now has over 27,000 active patents and manufactures over 40 billion devices each year. Such strong competitive advantages are hard to find, which is a major reason why BDX has maintained a long history of dividend growth.
Valuation & Expected Returns
Based on expected adjusted EPS of $12.80 for fiscal 2021, representing the midpoint of management guidance, BDX stock currently trades for a price-to-earnings ratio of 19.1. Our target price-to-earnings ratio is 18.6, which matches the stock’s 10-year average P/E multiple. While this means the stock is slightly overvalued, the effect on future shareholder returns will be quite modest.
To that end, if the current P/E multiple of 19.1 declines to 18.6 over the next five years, annual shareholder returns would only be reduced by 0.5% per year over that period. Plus, shareholder returns would be boosted by future earnings-per-share growth and dividends.
We expect BDX to generate 10% annual EPS growth over the next five years, indicative of the company’s competitive advantages and growth potential from the various catalysts mentioned earlier. Lastly, shares have a current dividend yield of 1.4%.
Putting it all together, we expect BDX to generate total returns of 10.9% per year over the next five years. This is a strong expected rate of return, particularly for a steady blue chip dividend stock. As a result, we view BDX stock as a buy for dividend growth investors looking for high total returns.
Final Thoughts
Healthcare is a growth industry, as the major healthcare products manufacturers such as BDX will benefit from the aging population and growth in the emerging markets. This growth will naturally flow to shareholders in the form of rising earnings growth and annual dividend increases. BDX has increased its dividend for nearly 50 consecutive years.
With a 1.4% current yield, BDX is not a high-yield stock by any means. Instead, the stock provides a yield that is at least on-par with the S&P 500 Index, along with dividend growth. BDX is a top Dividend Aristocrat for 2021 and beyond.
