Contents
Summary
- Following the release of Q3 and YTD2019 results and reaffirmed FY2019 guidance, BDX’s share price jumped on August 6th.
- BDX has multiple planned product launches. Investors would be advised to look beyond the reduction in planned drug-coated balloons (DCB) sales which only represent about 1% of BDX’s total business.
- Management remains committed to delever BDX’s balance sheet. Gross leverage has been reduced to 3.7 times as at the end of Q3 versus 3.9 times as at FYE2018.
- Debt reduction is a key priority but investors can likely expect an increase in BDX’s dividend (mid-November 2019 declaration) so that BDX’s lengthy track record (47 years) of dividend increases does not get interrupted.
Introduction
In my May 12, 2019 Becton, Dickinson and Company (BDX) article I reviewed Q2 2019 results and FY2019 guidance. Based on my analysis I viewed shares as being attractively valued at $225.40 and on May 13th I acquired additional shares at $225.05 for an account on which I do not disclose details.
Subsequent to my most recent purchase, BDX’s share price appreciated to ~$258 on July 30th. Very recent volatile market conditions, however, resulted in BDX retracing to ~$229 the morning of August 6th. I would have acquired additional shares but was indisposed and missed the buying opportunity. As I compose this article following the August 6th market close, BDX is trading at ~$242.14.
Now that BDX has released Q3 and YTD2019 results on August 6th I take this opportunity to very briefly review this high quality company.
Q3 and YTD2019 Results
Q3 and YTD2019 results can be accessed here.
Despite significant FX headwinds in Q3, BDX delivered adjusted EPS at $3.08 which is the first time this metric has surpassed $3/share since the closing of the C.R. Bard acquisition.
As anticipated, BDX's results include a reduction of approximately 50% in planned drug-coated balloons (DCB) related sales in Q3.
BDX gained the Lutonix DCB business when it acquired C.R. Bard in 2018; DCBs represented an estimated $0.2B in sales and were among the company’s faster-growing product-lines. In recent quarters, DCB sales have taken a hit due to safety concerns that emerged in December 2018 and grew after the January and March FDA advisory letters.
In June 2019, the FDA released an update to its March 2019 Letter to Healthcare Providers on the subject matter of DCBs.
FY2019 Guidance
While BDX continues to work with the FDA, investors should recognize that DCBs are ~ 1% of the total BDX business. There are multiple planned product launches in each of BDX’s 3 lines of business which should offset the decline in the DCB business.
Source: BDX – Q3 2019 Earnings Presentation – August 6 2019
Despite various headwinds, the negative impact of divestitures, DCBs, and foreign exchange headwinds, BDX has reaffirmed its FY2019 adjusted EPS guidance.
Source: BDX – Q3 2019 Earnings Presentation – August 6 2019
Adjusted diluted EPS guidance of $11.65 - $11.75 remains unchanged. This represents a 6% - 7% increase from $11.01 realized in FY2018.
Credit Ratings
There has been no change in BDX’s credit ratings subsequent to my May 12, 2019 article. BDX’s credit ratings (BBB (S&P) BBB-(Fitch) Ba1 (Moody’s)) place it in the top tier of the non-investment grade speculative category.
In my May 12th article I wrote how BDX’s management has provided progress reports on the deleveraging process following the C.R. Bard acquisition. Q3 was no exception as BDX repaid ~$0.45B of debt
As at FYE2018 (September 30th), BDX’s gross leverage ratio was 3.9 times. As at the end of Q3 2019, gross leverage was 3.7 times.
Management once again reiterated that BDX remains remain on-track to achieve its commitment to delever to below three times over three years.
Dividends and Dividend Yield
BDX’s dividend and stock split history can be found here.
Using the current $242.14 share price and the $0.77/quarter ($3.08/year) dividend we arrive at a ~1.27% dividend yield; the September 30th $0.77 dividend will mark the 4th quarterly dividend at this level.
As mentioned in my previous article, BDX views maintaining its lengthy track record (47 years) of dividend increases as important. Deleveraging the Balance Sheet, however, is a key priority. As a result, I am of the opinion that investors should temper their expectations when it comes to dividend growth until such time as management achieves its leverage target.
Keeping the importance of deleveraging and the track record of continuous dividend increases in mind I expect BDX will increase its quarterly dividend by $0.02 to $0.79 commencing with the end of December dividend payment.
At $3.16/year, the dividend yield increases to ~1.3% on the basis of the current $242.14 share price.
Valuation
At the time of my January 10, 2018 article, a dozen analysts had projected FY2018 adjusted diluted EPS of $10.87. Based on the ~$223.7 closing stock price, the forward adjusted diluted PE was ~20.6.
When I wrote my January 30, 2018 article, BDX was trading at $246.28. Using the unchanged projected FY2018 adjusted diluted EPS for FY2018 I arrived at a forward adjusted diluted PE of ~22.66.
In my November 6, 2018 article I noted that BDX was trading at $240.69 and that FY2019 adjusted diluted EPS guidance of $12.05 - $12.15 had just been released. Using the $12.10 mid-point I arrived at a forward adjusted diluted PE of ~19.9.
When I wrote my February 6, 2019 article, Q1 2019 adjusted diluted EPS guidance reflected no change from the November 6th guidance. Shares were trading at ~$242.50 giving us a forward adjusted diluted PE of ~20.04.
When I wrote my May 12, 2019 article, BDX had just reported Q2 2019 and FY2019 results and had lowered adjusted diluted EPS guidance to $11.65 - $11.75 ($11.70 mid-point). With shares trading at $225.40 I arrived at a forward adjusted diluted PE of ~19.26.
Shares are now trading at $242.14 and adjusted diluted EPS guidance of $11.65 - $11.75 ($11.70 mid-point) remains. BDX’s forward adjusted diluted PE is now ~20.7.
Final Thoughts
Despite the broad market recovery on August 6th following the worst ‘down’ day of the year, I am of the opinion investors should expect further pullbacks in the short-term. I think there will be opportunities to snap up BDX shares at $225 (or less) and would not rush to acquire shares following the August 6th surge in BDX’s share price.
My intent is not to trade any BDX options. I will merely bide my time in the hopes of a more favorable valuation.
I wish you much success on your journey to financial freedom.
Thanks for reading!
Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long BDX.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
