Becton Dickinson - Stock Analysis

After my August 6, 2021, Becton Dickinson (BDX) stock analysis, the company:

  • released Q4 and FY2021 results and FY2022 guidance on November 4; and
  • held its 2021 virtual Investor Day on November 12.

Investors who invest solely based on stock price performance will view BDX to be a poor investment. Looking at BDX's shareholder return after the closing of its last major acquisition (C.R. Bard) on December 29, 2017, we see that BDX's total investor return has grossly underperformed the broad S&P500 index.

Investing purely based on stock prices, however, is a poor way to invest. A more appropriate way to examine a company's underlying fundamentals and prospects.

Looking at BDX's performance during the timeframe in which it has been integrating Carefusion (acquired October 5, 2014) and CR Bard, we see that it:

  • significantly lowered net leverage from more than 3.4x following the CR Bard acquisition to ~2.6x at the end of FY2021;
  • restored its investment-grade credit rating in the timeframe management communicated when it announced the acquisition of CR Bard;
  • increased its revenue from ~$12B in FY2017 to ~$20.2B in FY2021;
  • grew net cash provided by operating activities from ~$2.55B in FY2017 to ~$4.647B in FY2021;
  • improved free cash flow from ~$1.823B in FY2017 to ~$3.416B  in FY2021;
  • taken measures to reposition itself to accelerate the creation of sustainable long-term growth; the spin-off of the Diabetes Care business in the first half of FY2022 is part of BDX's strategy to accelerate growth and drive stronger margins.

Becton Dickinson - Stock Analysis - Business Overview

A good overview of BDX and its 3 worldwide business segments is found in Part 1 Item 1 in the FY2020 10-K.

A comprehensive list of all BDX's offerings is accessible through the Offerings portal found at the top of this web page.

BD Alaris Pump Remediation

As noted in my August 6 post, BDX announced at the end of July that it is working with the FDA and is currently initiating remediation of existing Alaris system devices in the field. A new software version is intended to remediate the issues identified in the February 4th, 2020 recall notice, and will provide programming, operational, and cybersecurity updates. This software update, however, still requires FDA review and clearance; BDX is not definitively predicting the FDA clearance in its FY2022 outlook given the inherent difficulty in predicting FDA clearance timelines.

BDX 2025 Strategy - Grow, Simplify, and Empower

A high-level overview of BDX's 2025 strategy was provided in my previous post. A very comprehensive 2021 Investor Day Presentation provides a wealth of information as to how BDX expects to grow, improve margins and profitability, and enhance shareholder returns during FY2022 - FY2025.

Diabetes Care Spin-Off

In May 2021, BDX announced its intent to spin off its Diabetes Care business in the first half of FY2022 as an independent, publicly-traded company; the spin-off is intended to be tax-free for US federal income tax purposes.

Management continues to believe the spin-off is a significant value-creating opportunity for shareholders.

The NewCo will be one of the largest pure-play diabetes companies in existence today. By being a stand-alone entity, it will be able to focus on its strategic goals, drive strong cash flow and allocate its capital more efficiently and effectively to drive higher growth.

BDX - Diabetes Care Spin-Off - November 12 2021

Source: BDX - 2021 Investor Day Presentation - November 12, 2021

The proposed spin-off enhances RemainCo's revenue and EPS growth profile as Diabetes Care revenue growth is slower than the corporate average and its margins are declining.

RemainCo is expected to receive a cash distribution equivalent to multiple years of cash generated by the Diabetes Care unit. Management plans to provide more details related to the proceeds and intended use at a later date.

The plan is to restate financials after the effective date of the spin-off to classify the diabetes business as a discontinued operation.

BDX is also progressing with the SEC Form 10-12B which will have the carve-out financials. More comprehensive details about the spin-off should be publicly available around the end of 2021.

Becton Dickinson - Stock Analysis - Financials

Q4 and YTD2021 Financial Results

On November 4, 2021, BDX released Q4 and YTD results and FY2022 guidance. The 10-K is not yet available but financial results are available in BDX's Form 8-K and the accompanying earnings presentation.

FY2022 Guidance

Management is projecting a lower gross margin in the first half given that increased inflation began earlier in FY2021 and the benefit of cost improvement initiatives that have been initiated will lag as they flow through inventory. The inflation flow through to inventory is expected to be most prominent in Q2 and to improve across the balance of the year.

BDX - FY2022 Guidance - November 4 2021

Source: BDX - Q4 2021 Earnings Presentation - November 4, 2021

 

BDX - FY2022 Adjusted EPS Guidance - November 4 2021

Source: BDX - Q4 2021 Earnings Presentation - November 4, 2021

Becton Dickinson - Stock Analysis - Credit Ratings

BDX's domestic senior unsecured debt ratings remain unchanged from the time of my last review.

  • Baa3 (Moody’s) is the lowest tier within the lower medium grade category;
  • BBB (S&P) is the middle tier within the lower medium grade category;
  • BBB- (Fitch) is the lowest tier within the lower medium grade category.

All 3 ratings are investment grade and define BDX as having ADEQUATE capacity to meet its financial commitments. Adverse economic conditions or changing circumstances, however, are more likely to lead to a weakened capacity for BDX to meet its financial commitments.

These ratings are satisfactory for my purposes.

Becton Dickinson - Stock Analysis - Dividends and Share Repurchases

Dividend and Dividend Yield

BDX’s dividend and stock split history can be found here.

On November 4th, BDX announced a $0.04 increase in its quarterly dividend ($0.83 to $0.87) effective with the dividend payable December 31. This dividend increase marks the 50th consecutive year in which BDX has increased its dividend. With shares trading at ~$244, the forward dividend yield is ~1.4%.

Despite the impending spin-off of the Diabetes Care business in FY2022, management has reiterated the company's commitment to continued dividend growth as a driver for shareholder returns.

The current ~28% dividend payout ratio is calculated based on FY2022 assumptions and represents the midpoint of the FY2022 adjusted EPS guidance range of $12.30 - $12.50 issued on November 4, 2021.

This dividend payout ratio is expected to increase after the spin-off but the dividend will continue to be adequately covered by net cash provided by operating activities.

Share Repurchases

The weighted average number of outstanding shares in FY2011 - 2021 (in millions rounded) is 226, 209, 199, 198, 208, 218, 224, 265, 275, 282, and 292.

In conjunction with the CR Bard acquisition, BDX suspended share repurchases until investment-grade credit ratings were restored. Having accomplished this in FY2021, BDX has resumed share repurchases; in Q3 and Q4, BDX repurchased $1B and $0.75B for an FY2021 total of $1.75B.

This marks the first share repurchase since 2017 and the largest share repurchase since 2012.

Becton Dickinson - Stock Analysis - Valuation

When I wrote my February 5, 2021 post, adjusted diluted EPS guidance had been raised to $12.75 - $12.85. In addition, FY2021 adjusted diluted EPS guidance from 18 brokers was a mean of $12.77 and a low/high range of $12.40 - $13.01.

BDX was trading at ~$254.70 thus giving us a forward adjusted diluted PE of ~20 using the mid-point of management's guidance and ~19.6 if we used the high end of analyst guidance.

When I published my August 6th review, BDX was trading at ~$241. Using the $12.90 mid-point of management's $12.85 - $12.95 guidance, the forward adjusted diluted PE was ~18.7.

Using this share price and FY2021 - FY2023 guidance from the brokers which cover BDX resulted in the following projected adjusted diluted PE levels:

  • FY2021 - 19 brokers - mean of $12.87 and low/high of $12.80 - $13.00. Using the mean, the forward adjusted diluted PE was ~18.7.
  • FY2022 - 19 brokers - mean of $12.64 and low/high of $12.00 - $13.60. Using the mean, the forward adjusted diluted PE was ~19.1.
  • FY2023 - 13 brokers - mean of $13.83 and low/high of $13.40 - $14.71. Using the mean, the forward adjusted diluted PE was ~17.4.

Management's FY2022 adjusted diluted EPS guidance is $12.30 - $12.50. Using the $12.40 mid-point and the current ~$244 share price, the forward adjusted diluted PE is ~19.7.

The following are the projected adjusted diluted PE levels based on current FY2022 - FY2023 broker guidance:

  • FY2022 - 12 brokers - mean of $12.38 and low/high of $12.10 - $12.44. Using the mean, the forward adjusted diluted PE was ~19.7.
  • FY2023 - 11 brokers - mean of $13.68 and low/high of $13.43 - $14.00. Using the mean, the forward adjusted diluted PE was ~17.8.

The number of brokers who have provided guidance is well below that at the time of my previous post. I envision the overall broker guidance changing over the coming weeks as new guidance is provided.

Only 5 brokers have provided FY2024 guidance, and therefore, I consider these estimates to be incomplete and unreliable.

BDX post-spin-off is expected to be a faster-growing and higher-margin company. In addition, there will be a significant influx of cash at the time of the spin-off which is to be deployed to accelerate BDX's growth and improve margins.

Investors will need to revisit BDX's valuation once more specific details are provided about the spin-off.

Becton Dickinson - Stock Analysis - Final Thoughts

Although BDX's investment returns have been substandard in recent years, I do not think the current share price accurately reflects all the improvements BDX has made after the Carefusion and CR Bard acquisitions.

If all goes according to plan, I anticipate BDX's valuation will increase following the spin-off of the Diabetes Care business.

Although I consider BDX to currently be reasonably valued, I will not be adding to my existing position. I started acquiring BDX shares in one of our retirement accounts in February 2009 and have added to my position over the years. In addition, I initiated a position in November 2019 in one of the 'Side' accounts within the FFJ Portfolio. BDX was my 5th largest position at the time of my FFJ Portfolio Holdings Review in April 2021 and I consider my existing exposure to be satisfactory.

I do plan to retain whatever NewCo shares I receive from the spin-off.

I wish you much success on your journey to financial freedom!

Note: Please send any feedback, corrections, or questions to [email protected].

Disclosure: I am long BDX.

Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.

I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.