I love investing in companies with recurring revenue streams.
One of the best examples of this is the old “razor blade” business model. You sell customers on a great razor blade system that requires them to buy new razor blades when the old ones wear out and you’ve got yourself a recurring revenue stream for years.
There are quite a few companies out there that have built successful empires off similar business models, and doing so creates a profit stream that can last decades.
But what does this mean for dividend growth investors?
Well, a recurring stream of cash flow coming a company’s way means they’ve got cash to send shareholders’ way in the form of dividends.
And one company has built a very successful business model of selling high-quality disposable products and has increased its payout to shareholders for decades.
That company is Becton, Dickinson and Co. (BDX).
They sell a number of products in the healthcare space that require frequent replacement, including needles, syringes, catheters, and disposable containers. In addition, they have successful product offerings in fluid collection systems, screening systems, and drug delivery systems.
Becton, Dickinson and Co. (BDX) is a medical technology company, and provides a wide range of medical devices and diagnostic equipment.
They operate in three segments: Medical (53.4% of fiscal year 2013 sales); Diagnostics (32.8%); Biosciences (13.7%). Operations are further diversified geographically: US generated 41.6% of FY ’13 sales; Europe, 31.2%; Latin America, Canada, and Japan, 14.7%; Asia Pacific 12.5%.
The healthcare sector is one of my favorite sectors to invest in. You have millions of baby boomers here in the US retiring and getting older every single day. And as these people get older, they increasingly need access to healthcare products and services.
Furthermore, economies around the world are developing and citizens within many developing countries are gaining access to medical care. And that’s where a company like Becton, Dickinson and Co. comes in. Not only do they produce the products that hospitals, clinics, and health agencies around the world require, but many of their products are disposable in nature, thus creating a recurring source of profit.
The growth in both revenue and profit for BDX has been fairly strong over the last decade. Their fiscal year ends September 30.
Revenue grew from $4.935 billion in FY 2004 to $8.054 billion in FY 2013. That’s a compound annual growth rate of 5.59%. Not too shabby at all.
Earnings per share grew from $2.21 to $4.67 during this same 10-year stretch, which is a CAGR of 8.67%. Though earnings have been a bit lumpy over the last couple of years, we’re looking at very solid growth here. And it appears this kind of growth isn’t stopping either; S&P Capital IQ predicts EPS to grow at a compounded annual rate of 10% over the next three years.
You would probably expect that a company selling high-quality products in a growing sector of the economy to be doing well, but are they sharing some of that profit with shareholders?
BDX has been paying increasing dividends for the last 43 consecutive years. That’s more than four decades of not just paying dividends, but increasing them every single year. Talk about consistency. As such, they’re featured on David Fish’s Dividend Champions, Contenders, and Challengers list, which tracks 550 stocks that have at least five consecutive years of dividend raises.
And the dividend raises have been pretty substantial. Over the last decade, BDX has increased its dividend at an annual clip of 17.6%. Not too bad at all when we’re talking about a stock that already yields 1.85%.
And with a payout ratio of just 44.2%, I expect dividend growth to remain strong for the foreseeable future, especially if double-digit earnings growth materializes.
The balance sheet reveals more of the same: a well-managed firm.
The long-term debt/equity ratio stood at 0.75 at the end of FY ’13, while the interest coverage ratio is 9.4.
So that means BDX can cover interest expenses via earnings before interest and taxes more than nine times over.
Profitability is very robust. Net margin has averaged 15% over the last five years. Return on equity, meanwhile, came in at 25.6% at the end of 2013.
I’m kind of upset at myself that I didn’t invest in BDX a while ago, as it’s not one of the 49 stocks that currently make up my Freedom Fund. But you just can’t win them all. However, I remain vigilant and hope to initiate a position at some point in this wonderful healthcare company.
There’s just not much to dislike here. The growth has been attractive across all levels of the business over the last 10 years, and the dividend growth streak is mighty impressive. I see no reason why this company can’t continue increasing its dividend payout for the next two or three decades, or longer. Just imagine collecting more and more income every year for decades of your life. That could quite literally change your future.
Their product offerings are pretty broad in scope. Not only do they provide some of the products I listed above, but they also offer cell imaging systems, drug transfer devices, medication workflow solutions, rapid diagnostic assays, and reagent systems for life science research.
So they have a stable business providing disposable products to hospitals and clinics, while also providing a number of systems and devices that clients like reference laboratories, pharmaceutical companies, blood banks, and clinical laboratories require.
Of course, like any business, there are risks. Primarily, they have to worry about competition. The healthcare space is relatively stable, but competition is fierce. Furthermore, there are regulations and litigation to worry about. In addition, new products are routinely introduced in the marketplace.
BDX shares are priced at a P/E ratio of 23.94 right now, which appears to be quite rich here. I think a company like BDX is probably worth a premium considering the quality of the business, long-term track record, and growth rate. However, the five-year average P/E ratio is only 16.8.
I valued shares using a dividend discount model analysis with a 10% discount rate and a 8% long-term growth rate. I used a rather aggressive growth rate, which seems appropriate considering it’s still below BDX’s 10-year growth rate in both earnings and dividends. This gives me a fair value on shares of $117.72, which is about where shares trade right now.
Bottom line: Becton, Dickinson and Co. (BDX) sells high-quality products in the healthcare space, many of which are disposable and have to be replaced. This creates constant demand for their products, which means recurring profit that BDX can use to both grow the business and also pay shareholders rising dividends for decades on end. They’ve paid increasing dividend payouts for the last 46 consecutive years, and I think another 46 years is very likely.