DRIP Portfolio Candidate: Becton, Dickinson

This week, Fool analyst Jason Moser is standing in for Todd Wenning,  pitting Walgreen against Bryan Hinmon's Buffett-approved Becton, Dickinson (NYSE: BDX  ) in the Fool DRIP Portfolio's battle of health-care companies.

If you hate the flu like I do, you'll love that the Fool DRIP Portfolio is trying to make some money off it. Hey, if you can't beat it, profit from it. With health care making up 12% of the S&P 500, and demographic trends in North America and Europe creating a massive patient base, we're looking to find a high-quality, dividend-paying bulwark for our portfolio.

Jason and I have tied our hospital gowns up tight, and we're ready to pitch two undervalued and well-run health-care candidates for you to vote on. Both would likely make solid long-term holdings, but only one can win this battle.

Becton, Dickinson makes a $7 billion business out of selling syringes, catheters, scalpels and diagnostic tools to hospitals and clinics. Its products are diverse and nondiscretionary, which translates into a stable business that helps keep the world healthy.

If this sounds like fundamentals, your needle has hit the bull's-eye. The company focuses on the basics that make medical treatment possible: blood collection, diagnostic testing, and drug delivery. Of course, I'd be selling the company short if I didn't mention that it's highly innovative and has done wonders for patient safety by offering products that reduce the spread of infection.

Becton, Dickinson has spread the love to shareholders, though, with 37 consecutive years of dividend increases. Injecting this DRIP candidate into your portfolio should be a healthy decision.

Four reasons to dance the DRIP with Becton, Dickinson

  • Repeat, repeat, repeat sales. Many of the company's products are for testing and non-elective surgery, so patients can't do without them. Better yet, the bulk of wares are one-time use disposables, so Becton, Dickinson benefits from a lot of repeat purchases. Add in new products, moderate switching costs, and a little pricing power, and it's easy to see how sales have increased each of the past 10 years.
  • Operationally brilliant. Over the past five years, sales have grown at a 7% clip, with net income growing at 14%. Fanatical attention to cost reduction and bringing production closer to major distribution points has led to consistently improving operating margins. Returns on invested capital have eclipsed 15% year in and year out, leaving money for shareholders.
  • Let's partner with Warren Buffett. Back in the first half of 2009, Buffett established a position in Becton, Dickinson. The legendary investor gobbled up 1.2 million shares, a stake worth $85.6 million. Since he announced his position, Buffett has added to his stake in three of the four quarterly periods, increasing his stake by a meaningful 57%.
  • Shares are cheap. Big health care has been out of favor, and shares of Becton, Dickinson are the cheapest of the lot. Check out how the company stacks up against other nuts-and-bolts, solid health-care companies:
Company EV/EBITDA P/E EV/FCF Dividend Yield
Becton, Dickinson 7.7 times 14.8 times 16.3 times 2%
Covidien (NYSE: COV  ) 7.9 times 16.3 times 15.6 times 2%
C.R. Bard (NYSE: BCR  ) 8.7 times 17.0 times 14.7 times 0.9%
Thermo Fisher Scientific (NYSE: TMO  ) 9.9 times 21.0 times 15.0 times 0%

Source: Capital IQ, a division of Standard & Poor's.

Modeling more stability and modest 4% sales growth over the next decade lead me to believe shares are worth north of $90.

Risks to consider

  • Good ole' legislative uncertainty. The company's customers are generally reimbursed for some of their services by the government and insurance companies. With the health-care overhaul set to take hold in a few years, hospitals and insurance companies are still sorting out the manner and level of reimbursements for some treatments. In addition, some of Becton, Dickinson's products may be subject to the 2.3% medical device excise tax.
  • Low-cost knockoffs. Some of the company's products are commodities and are susceptible to cheaper substitutes. Product reliability and patient safety are also key concerns in hospital purchasing decisions that retard the threat of competition.
  • Exposure to Europe and foreign currencies. Still mired in debt and other troubles, Europe remains a customer with risk. During fiscal 2009, 35% of revenue came from Europe. Total non-dollar currency exposure is large, with 55% of revenue coming from outside the U.S.

Foolish bottom line
Becton, Dickinson offers performance and dividend increases as predictable as flu season. Do you think the company should graduate from a Fool DRIP Portfolio candidate to a holding? Chime in below by leaving a comment.

Want to discuss Becton, Dickinson or DRIP investing further? Meet us on the DRIP Investing board here on Fool.com.

Check out a complete catalog of previous Fool DRIP Portfolio articles here.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool analyst Bryan Hinmon doesn't owns shares of the companies mentioned in this article . Motley Fool Inside Value has recommended Becton Dickinson, Covidien, and Thermo Fisher Scientific. You can try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2010, at 12:31 PM, TMF42 wrote:

    Hey Fools!

    Don't forget to vote for which company you think we should add to the Fool DRIP Portfolio: Becton, Dickinson or Walgreen.

    Bryan

    TMF42

  • Report this Comment On October 07, 2010, at 6:41 PM, TMFMMTInvestor wrote:

    Bryan,

    BDX, hands down! Especially considering its potential for growth in emerging markets (compared to WAG's) (1) as Western health standards are adopted abroad, and (2) the number of EM middle class consumers grow in size, and they live longer and access more health care.

    I'm curious as to how and why you decided on BDX over other compelling possibilities like MDT and BAX. I like all three.

    Also, this John Mauldin-rec'd piece on health case as "The Ultimate Hedge in Economic Crisis" might be of interest to some readers:

    http://www.investorsinsight.com/blogs/john_mauldins_outside_...

    Scott

  • Report this Comment On October 08, 2010, at 10:16 AM, TMF42 wrote:

    Hey sjf2005:

    Thanks for the vote and I totally agree (as you might expect).

    As for your question on why I chose Becton, Dickinson over Baxter and Medtronic...

    Well, Baxter doesn't offer a direct share purchase plan (DSP), and since we are building the Fool DRIP Port from scratch, we have decided to limit ourselves to companies that offer both DSPs and DRIPs. So that is the easy one.

    Medtronic is a company that I like very much. It's similar to BDX in that it is well run, dominates its niches, generates great returns on capital and is cheap right now.

    There are two main reasons why I went with BDX:

    (1) I view Becton's products as slightly less non-elective -- meaning that their sales levels should be easier to maintain regardless of the underlying economic climate. Given the state of the global economy, I opted for this stability, while possibly giving up the higher relative upside of Medtronic. (Let's concentrate on not losing money, first and foremost.)

    (2) Medical devices are more tech-centric than medical products (at least marginally so). I doubt my ability to see competitive threats coming around the corner for any medical device company to a much greater degree than I do for a medical products company. And since the market is definitely expressing concerns about Medtronic losing a grip on some of its key markets (a la St. Jude and small new players and their suped-up technologies) I have to resepct that. In the long run, I think Medtronic's financial health, heavy R&D spending, entrenched position and acquisitioni strategy will see them through this period of uncertaintly.

    Bryan

    TMF42

  • Report this Comment On October 12, 2010, at 4:29 PM, MichaelinPV wrote:

    Vote for BDX or WAG. Either way, I win. I own both and will keep adding to both.

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