The Dividend Kings can be considered among the best dividend growth stocks as companies in this group have raised dividend for at least 50 consecutive years, explains Bob Ciura, contributing editor to Sure Dividend.

There are just 35 such companies, showing how difficult it can be to gain entrance into this exclusive index. Here, we begin a five-part series counting down 5 favorite stocks among the Kings.

Within this group are a number of healthcare stocks, which is a sector that is often an excellent place to find dividend growth stocks. Healthcare is one of the more recession-resistant sectors of the economy, as consumers will place their health above most other needs, even in a recession.

This allows for many healthcare companies to produce consistent earnings, often leading to the initiation of a dividend and annual dividend increases.  One of our top ranked healthcare stocks that recently became a Dividend King is Becton, Dickinson & Company (BDX).

Business Overview & Recent Events

Becton, Dickinson & Company, or BD, is a leading medical device maker that is composed of three segments, including the Medical Division, Life Science and Intervention. The company generates annual revenues in excess of $20 billion.

The company’s most recent quarter was a solid finish to an outstanding year. The company reported fourth-quarter and fiscal year results on November 4th, 2021. For the quarter, revenue grew 7.3% to $5.14 billion while adjusted earnings-per-share fell 7.2% to $2.59. Both figures were ahead of what analysts had anticipated.

For fiscal 2021, revenue grew 18.3% to $20.3 billion and adjusted earnings-per-share increased 28% to $13.08. Intervention, Medical and Life Science all performed well, with revenue growing 8.3%, 7.7% and 1.5%, respectively.

Intervention continued to see a recovery in elective surgical procedures that were postponed due to the Covid-19 pandemic while demand for medication delivery solutions remained elevated. Life Sciences benefited from higher demand for products resulting from lab use normalizing compared to last year. Excluding Covid-19 related revenues, this segment grew by 16%.

The company issued guidance for the new fiscal year as well. The company sees adjusted earnings-per-share in a range of $12.30 to $12.50 for fiscal 2022, a 5.2% decrease from last year at the midpoint. This would still be Becton, Dickinson's second-best result ever if achieved.

More recently, the company announced in early December that it was raising its dividend by 4.8% for the December 31st, 2021 payment date. The most recent increase of 4.8% was its 50th consecutive year of dividend growth. The projected payout ratio for the fiscal year is just 28% at the midpoint of company’s guidance.

Competitive Advantages & Growth Prospects

BD is one of the leading medical device companies, with a top spot in almost every category that it competes. This put the company in a strong position to supply the demand of the healthcare system for Covid-19 related products, such as was tests, syringes and infusion pumps.

The Covid-19 pandemic has been a tailwind to results for the healthcare companies that produce related products. This was true for Becton, Dickinson during fiscal 2021. Covid-19 related revenue totaled $316 million, or 6.2% of total revenue, in the fourth-quarter and $2 billion, or 9.7% of the total revenue, for the fiscal year.

Sequential Covid-19 revenue was lower as demand for products subsided somewhat. With the emergence of the Omicron variant, however, it is possible that demand could surge again, delivering more revenue for the company.

Investors will take note that this isn’t just a Covid-19 story, one that will hopefully fade eventually. Excluding Covid-19 related revenue, the company still saw revenue grow 10.5% from the prior year. A portion of this double-digit gain is due to weakness seen last year in areas such as surgery, but Becton, Dickinson's  saw its top-line grow nearly 6% compared to fiscal year 2019.

Solid growth in the base revenue against a more normalized operating environment is due to the firm's market share and ability to achieve growth regardless of the state of the economy.

Becton, Dickinson remains a global power as only slightly more than half of annual revenue comes from the U.S. The company operates in nearly 200 countries around the world, giving it a vast potential patient pool to service. The business model is quite diversified as a result, giving the company some protection in case one or more regions of the world is facing challenges.

Valuation & Expected Returns

Becton, Dickinson's  has been a strong and consistent performer over the years, with an earnings-per-share CAGR of 10.4% over the last decade. Given the strengths of the company and its leadership position in a variety of areas, we feel that a 10% earnings growth rate going forward is achievable.

With shares closing at $257, the stock trades at 20.7 times the midpoint of the company’s guidance for the fiscal year. The stock has averaged a price-to-earnings ratio of 18.6 over the last decade. We feel that this is an appropriate valuation target. Reverting to our target valuation over the next five years would mean a 2.1% reduction in annual returns over this time frame.

The final component of total returns will be the stock’s dividend yield. Shares yield 1.4%, which is slightly ahead of the average yield of the S&P 500 Index.

In total, we expect that the stock will return 9.3% per year for the next half-decade. This projection stems from an expected earnings growth rate of 10% and starting dividend yield of 1.4% that are offset by a low single-digit headwind from multiple compression.

Final Thoughts

BDX is one of the newest entrants into the Dividend Kings. The company has become a well-known and trusted partner of healthcare systems around the world, giving it access to literally billions of potential customers.

The company’s business model has worked so well for so long that the dividend growth streak now extends into its fifth decade. While the stock’s yield is on the low side, the typical dividend raise has been solid and the projected payout ratio is very low.

Even better, the stock looks to offer total annual returns in the high single-digit range for the next five years. Investors looking for solid returns and a well-covered dividend might find BDX to be attractive.

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