In part 19 of the 54 part Dividend Aristocrats In Focus series, I analyze medical products creator CR Bard (BCR, Financial). CR Bard was founded in 1907 and has grown to over $3 billion per year in sales. The company has a long history of growth and has increased its dividend payments for 42 consecutive years.
Business overview
CR Bard operates in four business segments. Each segment is listed below, along with its percentage of revenue for the company’s full fiscal 2013.
- Vascular: 27% of sales
- Urology: 25% of sales
- Oncology: 28% of sales
- Surgical Specialties: 16% of sales
In addition, the company has a small catch all “other” division, which contributed 4% of sale in 2013. The vascular segment produces catheters and grafts for veins, arteries and the heart. The image below shows the segment’s 5-year growth rate:
The urology segment sells catheters, incontinence products and urological specialty devices. The segment has shown relatively slow growth over the past 5 years. The image below shows the segment’s 5-year growth rate:
The largest segment for BCR in 2013 was the oncology segment. The company’s oncology segment produces ports, cancer-treatment related catheters and enteral feeding products. Besides being the company’s largest segment, oncology also has the second-fastest growth rate. The image below shows the segment’s 5-year growth rate:
Finally, the company’s smallest segment is surgical specialties. The surgical specialties segment produces soft tissue repair products, performance irrigation products, and biosurgical products. The surgical specialties division’s 5-year growth rate is shown below:
Competitive advantage
CR Bard’s competitive advantage comes from its relationships with health care providers. The company’s long history has created strong distribution and sales networks that new entrants to the health care products industry would have a difficult time emulating.
The company has also committed to spending 8% of revenue on research and development. The company’s large research and development spending will help it to innovate new medical products and continue to build its intellectual property patent portfolio. Well-established innovative businesses have a competitive advantage in the amount of intellectual property and research and development know-how they have built up over decades.
Growth prospects
BCR is focusing its future growth initiatives in emerging markets. The company has increased its percentage of revenue generated in emerging markets to 8% in its second-quarter 2014 results. The company is attempting to boost its emerging market growth by increasing the number of employees (especially sales employees) it has in emerging markets. The image below shows the company has drastically increased the number of its employees in emerging markets. The company now has more employees in emerging markets than it does in the U.S. or Europe.
The company is expecting a 7% to 9% constant currency growth rate for full fiscal 2014, which is in line with the company’s current growth rate for the year. I believe the company will achieve this growth rate this year as management projects. The company’s future growth will be driven by the afformentioned push into emerging markets and increased research and development spending.
CR Bard has committed itself to spending 8% of revenues on research and development for 2014 in an attempt to spur innovation and new products for the company. The medical products industry does not stand still; new products that reduce costs for health care providers or do a better job of saving lives for patients means more sales for CR Bard. The company has a full-product pipeline which will incrementally grow the business in both developed and emerging markets.
Dividend analysis
CR Bard has an extremely low dividend yield of 0.6%. Because the dividend yield is so low, the company has a payout ratio of just 8.4%. Obviously, CR Bard has a lot of room to grow its dividend payments faster than overall company growth. While CR Bard is a dividend aristocrat in name and has technically increased its dividend payments for decades, its low dividend yield will likely not be very appealing to investors looking for current income.
With that said, the company is very shareholder friendly overall. CR Bard returns large portions of its cash flows to shareholders through share repurchases rather than dividends. Despite the company’s weak dividend payments, it has grown dividends per share at about 6.5% per year over the last decade, and earnings per share at nearly 13% a year over the same time period. CR Bard is likely more appealing for investors seeking growth than current income.
Valuation
So how much do you have to pay for a company that has grown earnings per share at nearly 13% over the last 10 years? CR Bard is currently trading for a PE ratio of 18.15, very close to the S&P500’s current PE ratio of 18.2. Over the last decade, CR Bard has traded at an average premium of 1.1x to the S&P500’s PE ratio. If you don’t expect the market to correct back to its historical PE ratio of about 15, now is a good time to enter into a position of CR Bard.
I believe the company’s true fair value is about 1.1x the historical market average PE ratio of 15. This would bring the company’s fair PE multiple to 16.5. I believe CR Bard should trade at a 1.1x premium to the market due to its long history of growth and double digit earnings per share growth rate.
Recession performance
CR Bard performed exceptionally well over the last recession. The company managed to increase revenue per share, earnings per share and dividends per share each year throughout the Great Recession of 2007 to 2009.
The company’s customers are largely health care institutions that are less exposed to the effects of recessions. No matter the economic climate, people simply cannot "put off" threatening health issues. As a result, CR Bard and most of the health care industry is resistant to the effects of economic recessions.
Final thoughts
CR Bard is a high-quality business with a double-digit 10-year earnings per share growth rate. Even better, it does not trade at a lofty PE multiple. The company is currently a Top 20 stock based on the 8 Rules of Dividend Investing due to its low payout ratio, relatively high growth rate, and low standard deviation of 21%. Overall, CR Bard is a solid investment for long-term investors seeking above market growth in a relatively safe industry.
