Cheap Stock With A Recent Dividend Hike
This article originally appeared on The Div-Net on December 1, 2011
I see a cheap health care stock currently on my radar that recently hiked its dividend by almost 10%. It has a P/E ratio of 13.16, and has a pretty solid balance sheet with a debt/equity ratio of 0.5. This medical surgical product manufacturer has a 5-year dividend growth rate of 15.5%, which is pretty solid. It has vastly underperformed the general market, currently down 12.71% on the year while the S&P 500 is only down 0.85%. This provides some potential value for the dividend growth investor. What company am I talking about?
Becton, Dickinson and Co. (BDX)
Per Morningstar:
Becton Dickinson is the world’s largest manufacturer and distributor of medical surgical products, such as needles, syringes, and sharps-disposal units. The company also manufactures diagnostic instruments and reagents, as well as flow cytometry and cell-imaging systems. International revenue accounts for 55% of the company’s business.
Anytime I look at a company and they are the world leader in their prospective industry that gets my blood flowing. They have paid dividends to shareholders since 1962, when they initially went public and have raised dividends for 38 years in a row.
The company produces products that need to be constantly replenished by hospitals. They produce syringes and needles that are constantly replaced, much like disposable razor blades that the average consumer uses. And, as emerging markets continue to develop their health care systems and as hospital technology advances there will be a greater need for the products that BDX manufactures and supplies.
It currently sports a 2.44% entry yield, which isn’t phenomenal but based on the business model I think that dividend growth can continue to outperform and quickly provide a shareholder outsized returns. Morningstar currently has BDX at a 4/5 star valuation, even after the recent market run-up.
What do you think? Are you a buyer of BDX at current prices?
Full Disclosure: None.
Thanks for reading.
Photo Credit: Lucid Nightmare
I like BDX and bought some more shares of it earlier this week. My cost basis is slightly above $75. It’s now trading below my purchase price. Guess that’s what happens when you buy before the ex-date. =/
Another stock I own, SYK, raised its dividend by 18% this week. Good stuff!
Henry,
I cam VERY close to pulling the trigger on BDX today after I purchased two other DG stocks on the market downturn. I’ll be discussing those two picks very soon. Right now, my third buy for December is between BDX, T, UNS, UTX and MDT. BDX is probably at the top of that list.
Have you looked ever looked into any utilities for a little yield boost to the portfolio. Utilities have done really well this year. One reader here, Stuart, recently bought UNS. Looks like an interesting play in the utility space. Big yield, huge growth…but the debt is higher than I like, even for a utility.
Congrats on the raise with SYK! That’s what this is all about!!
Best wishes!
I’ve looked at utilities in the pass. My problem with them is the capital intensive nature of the business. I don’t understand how they manage to pay a dividend when the operating cash flow barely covers the capital expenditures. Perhaps that why many utilities carry large debt.
Have you looked at OKE, SO, and ED? I’ve look at those in the pass. They seem pretty good.
My only high yielding (4+%) stocks are T and PM. I’m happy with a 2.5-3.0% yielding portfolio. I can always buy some bond ETFs later on to boost my yield. Some of those yield 7+%, pay a monthly dividend, and are relatively safe in my opinion. Have you thought about adding some ETF exposure to your portfolio?
Henry,
Thanks for responding back. Always appreciate your thoughts.
I have looked at OKE, SO and ED. ED’s dividend growth has slowed to a trickle last I looked and SO (as many utilities) has had a large run-up. OKE is up almost 50% YTD and pricey, in my opinion.
Speaking of T, what do you think of the high payout ratio and the possible $3bbn payout to T-Mobile, which includes spectrum? They still may get the deal done through asset sales, but it looks increasingly unlikely. The payout ratio for T was over 85% last I looked. Any concerns there? S&P still has them at a 5-star buy, and they have a huge yield and low debt. They also own 100% of their mobility business, so that’s attractive. I personally like T and VOD in the telecom space. You like T here?
Thanks again for responding. I appreciate it!
Jason,
No problem! It’s always great to bounce ideas around. Plus, you’re helping me kill time at work so thanks! =)
I like T before the T-Mobile announcement, and continue to like it with or without the merger. If you think about it, T has a subscription business model. People will continue to use their phones, internet, & TV so they’ll continue to be monthly subscribers. Hence, the cash flow is pretty predictable and stable.
As for the payout ratio (TTM), ESP payout 88%. But the free cash flow is 60%. So I think the dividend is relatively safe.
My cost basis for T is $28.75. Anything below that is good value.
There’s also VZ. The payout ratio (TTM) for VZ are:
ESP: 79%
FCF: 46%
Have you looked at them too?
Another stock I really like (and own) with a recent dividend rise is Hillenbrand (HI). Steady cash generating business with good financials. What’s more steady than death? And with some diversification and growth through their industrial division.
BDX I like but find JNJ and ABT to be cheaper. MDT I’ve been meaning to invest in but haven’t yet. Seems cheap anywhere below 38-40 though.
I think for telephone companies the FCF is more important than the payout ratio, due to the high depreciation for these companies and replacement cost.
The problems with VZ is valuation. It’s my largest position but I got in at $26-32. At $38 it seems to expensive. VOD seems much more attractively priced at this point, and for riskier positions TEF, FTE, and Deutsche Telecom all seem like great values (haven’t bought these, though I own VOD).
T, I own as well but think the penalty for the t-mobile transaction is excessive and not priced in.
Not adding to any of these at current valuations, and think there are better options available today, but enjoying the dividends in the telecom industry.
Utilties seem expensive right now too!
Henry,
I like your thoughts on T. Although I think the share price growth will be minimal, collecting a ~6% yield that grows slowly isn’t bad. I agree with you on the dividend being safe as well. Again, I really like that they own 100% of their mobility business and the debt level is very respectable for a telecom.
I’ve looked at VZ and VZ was actually one of the VERY few short-term trades I did. I purchased last fall and sold after the i-Phone announcement earlier this year, before this blog was started. All in all, I don’t like the valuation and I don’t like the fact that they only own 55% of their mobility. They have some legacy costs from wireline businesses and a lot of money has gone into growing their FIOS network.
I much prefer VOD here. No foreign withholding taxes, a higher yield, lower valuation, low debt, minimal wireline issues and one of the largest wireless companies in the world. I think VOD and T are strong plays in telecom.
By the way, do you work the night shift? I wouldn’t mind a schedule like that as I despise waking up early.
thomasa510,
Thanks for responding. I completely agree on using a FCF payout ratio with telecoms and I was doing back of the napkin calculations earlier, but totally agree with you.
No steadier business than death! Great point there!
I like BDX and I also like ABT, JNJ and MDT. JNJ is my largest position and ABT is also large for me. I recently purchased MDT. BDX is a solid health care play I don’t own yet, and it’s attractive. The low yield leaves a bit to be desired, however.
On telecoms, I agree with your notions. I don’t like VZ at these levels and I don’t like the company in general really. I think VOD is a solid play if you want in at VZ since they own 45% of VZ Wireless. You get huge international exposure as well as U.S. market share.
I don’t like some of the other foreign telecoms. I recently made a change in my portfolio regarding TEF, and I’m writing an article on that as well as my recent purchases. TEF’s debt load is out of control and management seems to have no way to alleviate that situation. They’ve discussed asset sales, but the assets that they want to offload nobody wants. I think the dividend policy is too aggressive and the debt situation is going to make that dividend unsustainable in my opinion. At any rate, that company makes me uneasy. And I don’t like to be uneasy. FTE would have been the better play here, but I like TEF’s Latin American operations. They just have way too much debt for me to be comfortable any longer.
I agree with you on utilities being expensive. Utilities have had a huge run in 2011 and it’s been one of the best sectors all year. Defensive in a crazy market.
You mention you like other opportunities. Anything catching your eye?
Best wishes!
I think there are a number of stocks that have run too high and, without a pull back, don’t seem attractively priced currently.
I think VOD, GE, MDT, NYB, BHP, UTX, and WM all seem reasonably priced at the moment though.
I’m working a tech start-up so the hours can sometimes be long. At least there’s free food lying around. My wallet is happy since I barely spend money on food nowadays.
Lower yield = higher capital growth. BDX is solid ;)simple as that!
Cheers
thomasa510,
I agree with you on most of your picks. I’m concerned with GE’s debt load, however. WM has a solid yield, but I’m not sure about some of their fundamentals.
Take care!
Henry,
Free food rocks! I sometimes get free breakfast or lunch at work and I get so happy!
Best of luck at the start-up.
Keep in touch.
Ninja,
I agree. BDX is a pretty solid pick at these levels. Low yield, but big capital/dividend growth opportunities here.
Thanks for stopping by!
Best wishes.
Back in November I started a position in BDX (25 shares at $70.99, giving me a 2.54% yield). I think it is a good company that will continue to do well in the future. With the first wave of baby boomers hitting their mid-sixties now, I think health care is going to become increasingly important and companies such as BDX will do strong business. Plus, I am viewing it as a long-term holding (20+ years), so stable dividend growth over time will make up for the low initial yield.
deedubs,
Great price there on BDX. That’s a pretty great entry yield for a company that has had such strong dividend growth. I think you made a fantastic pick there. BDX is up on the top of my watch list right now for a purchase within the next month or so. I hope I get close to your price! Great plan on the long-term, and I also plan on holding every company I purchase for a very long time as well. That’s when the compounding does its magic!
Thanks for stopping by. Best wishes with your investments.
DM and thomas, WM is one I am watching. WM has increased its payout ratio over the past years, but their business has a moat. They can afford to payout a higher percentage. From the research I’ve read, the growth has appeared to stall or slow.
However, I will try to employ the same strategy I did with PAYX. Buy it low enough such that it becomes attractive to income seeking investors (near 5% yield). This will necessarily put a floor on the price because both of these companies have moats (their business has not and probably will not decline anymore due to the recession).
So I bought PAYX at 25, they increased dividend to YOC of 5%. Even at a low growth rate of say 4%, this is a double digit return with dividend reinvestment.
I know you guys like the higher growth stuff, but this is what works for me.
I think KMI is the best stock right now. KMI has the best moat ever and gonna ride the gasboom for many years. Vivendi might be a good pick. p/e 6 and 8,4 % yield. 50 % payout ratio. Vivendi is a diversified conglomerate based in France and have 60 % ownership in activision blizzard.
Keep up the good work!
Greetings from Sweden
ägamintid (take my time)
sfi,
I love the garbage business, no doubt about it. People produce a ton of trash, and at increasing rates..so WM is attractive there. I’m not as big a fan of WM’s individual fundamentals. Declining revenues and increasing payout ratios is never very attractive, no matter how attractive the overall business might be. On the other hand, as a utility holding WM isn’t a bad pick. Solid yield, a fair amount of debt and a business that is never going anywhere. I do find value there in the fact that I know WM is going to be around 50 years from now due to their market share, economies of scale and infrastructure. I think once the general economy picks back up, WM will be increasing revenue again.
Again, not a bad pick but I just wonder if it’s the most attractive fish in the sea (right now).
Thanks for stopping by! And, I do agree that higher yield/slower growth stocks have their place in a DG portfolio, and certainly mine. TOT fits that role, and T will too. I think it’s important to have both high yield/slow growth and low yield/high growth in a portfolio, even for a person as young as me. The higher yield provides ample reinvestment capital to grow the portfolio (now) while the low-yielders are given time to catch up and start pumping out the reinvestment cash. They are like the rocket fuel to propel you into the upper ends of the lower atmosphere quickly and powerfully, then the lower yielders take you into the stratosphere and beyond.
Best wishes!
ägamintid,
Thanks for stopping by! Good to hear from you. I hope all is well in Sweden and I hope your journey is going great so far!
As far as KMI, it is on my watch list. I’m still not totally comfortable committing money to it, as I just don’t totally understand the business structure. That’s just me being honest. Sometimes, in business, things are a bit above my head and this is one of those times. I understand the business of gas pipelines and I can definitely agree that it’s a very lucrative toll-like business. I just don’t understand the partnership in totality and so therefore I feel a little uncomfortable putting my money into something I can’t totally value by myself. Investing in KMI would be a little faith on my part in letting other investors tell me it’s a good idea without really giving myself a great reason.
The thing that puzzles me about KMI and KMP is that it looks like KMI will be eventually sucking KMP a little dry as they have rights to a disproportionate amount of distributions. I’ve read some articles on how the general partnership works and the IDR, and it just seems that at some point KMI is going to milk that well a little dry, no? The other part that scares me is that I’m unable to fully value the investment vehicle correctly. It does look attractive, but again my lack of sophistication here leaves me a little hesitant.
Again, good to hear from you. Take care!
I hold BDX and am willing to buy at these prices. The dividend increase is a nice one.
Dividend Monk,
Absolutely agree. Today’s prices offer long-term value and the dividend increases will offer solid YOC in a short period of time.
Thanks for stopping by!