Becton, Dickinson and Company (BDX) is a medical supply company, with an operating history of 118 years.

BDX is a medical supplier of a wide range of products. Its products are used for a variety of purposes, some of which include diagnostics, infection prevention, surgical equipment, and diabetes management. Over the past 118 years, it has consistently innovated to produce industry-leading products.

BDX now has more than 40,000 associates and operates in more than 190 countries across the globe.

The company has paid increasing dividends for 44 consecutive years. This makes BDX one of only 50 Dividend Aristocrats – stocks with 25+ years of consecutive dividend increases. You can see a full list of the Dividend Aristocrats here.

Keep reading this article to learn more about the investment prospects of BDX.

Business Overview

The company is organized into two core segments, each of which has a large product portfolio:

BD Medical (69.4% of sales)

• Diabetes Care
• Medication Management Solutions
• Medication & Procedural Solutions
• Pharmaceutical Systems

BD Life Sciences (30.6% of sales)

• Biosciences
• Diagnostic Systems
• Preanalytical Systems

Every individual product line plays an important role within BDX’s two core segments. Several of them generate $1 billion or more of revenue each year.

Source: 2015 Annual Report, page 7

The company restructured its product portfolio last year with the $12 billion acquisition of CareFusion. The takeover significantly increased BDX’s size and scope in the fields of medication management and healthcare safety solutions. The acquisition doubled the size of BDX’s Medical segment.

This has helped the company continue to grow this year, even in a difficult business climate. Despite the pressure of the strong U.S. dollar, BDX increased revenue by 28% through the first three quarters of 2016.

BDX has also realized significant cost synergies from the merger. It acquired a company with similar manufacturing and distribution systems, which allowed BDX to cut duplicated costs. As a result, the company’s earnings-per-share rose 34% over the first nine months of 2016, adjusting for currency.

Growth Prospects

BDX has very attractive growth prospects. The company stands to benefit from two key growth catalysts:

• The aging U.S. population
• International Growth

Health care spending is growing at a faster rate than GDP in developed markets like the U.S.. The reason is that aging populations create higher demand for health care.

The other catalyst for BDX is international grwoth, particularly in emerging markets like China. Emerging markets have large populations and rising standards of living. Their economic growth is much higher than that in developed markets.

To capitalize on this, BDX is building its international presence, paricularly in China.

Source: 2016 Third-Quarter Earnings Presentation, page 9

Approximately 15% of BDX’s total revenue comes from emerging markets. This allocation should only rise going forward. BDX’s emerging market business is growing at a faster rate than its developed markets segment.

As a result of its growth catalysts, BDX should see strong growth revenue and earnings-per-share growth rates.

Source: 2016 Third-Quarter Earnings Presentation, page 18

BDX’s growth prospects are made possible thanks to its product innovation, which is one of its distinct competitive advantages.

Competitive Advantages & Recession Performance

BDX’s competitive advantage comes from its global scale, high product quality, and product innovation.

The barriers to entry in the medical supply industry are high, which prevents new competitors from entering the market and claiming share. That is because it is very costly to finance the significant research and development necessary to compete effectively.

In addition, BDX prides itself on its innovation. The company invests heavily in R&D, which is crucial for a health care company. For example, BDX intends to increase R&D spending by 6.5% in 2016.

Its R&D expense pays off, as BDX has a high-quality brand that commands significant pricing power. This allows the company to generate high profit margins. Over time, it can expand margins to increase profitability.

Source: 2016 Third-Quarter Earnings Presentation, page 12

Through the first three quarters of the year, BDX expanded operating margin by 280 basis points.

BDX performed incredibly well during the 2007-2009 recession. In fact, the company increased earnings-per-share each year of the Great Recession. That is an incredible accomplishment that few companies can say for themselves.

From 2007-2009, BDX grew earnings-per-share by 29%.

• 2007 earnings-per-share of $3.84
• 2008 earnings-per-share of $4.46
• 2009 earnings-per-share of $4.95

BDX performed so well because of its recession-resistant business model. Health care supplies are required to treat patients, regardless of the condition of the economy. Health care providers need to purchase supplies, and patients cannot do without necessary health care procedures.

As a result, BDX is heavily insulated against economic downturns. The company is one of the 10 most recession resistant Dividend Aristocrats.

Valuation & Expected Total Return

BDX stock has an adjusted price-to-earnings ratio of 19.9. This is below the S&P 500 average price-to-earnings ratio, of 24.3. It’s important to use adjusted earnigns rather than GAAP earnings for BDX (and many other health care stocks). Adjusted earnings more accurately reflect underlying earnings power.

BDX definitely qualifies as a premium company. It operates in a growth industry, with a highly profitable business model and excellent brand strength.  The company appears to be somewhat undervalued relative tot he market at current prices.

Even if one were to assume no expansion in the price-to-earnings ratio from here, investors can still earn solid returns. Going forward, investor returns will be comprised of earnings growth and dividends. A reasonable scenario in the future is as follows:

• 8-10% earnings growth
• 1.6% dividend yield
• 9.6%-11.6% total returns

Earnings growth could even exceed this assumption. Over the past 10 years, BDX grew earnings by 8.1% compounded annually. It is important to note that this time period included the Great Recession.

In a slow-growth economic climate, the company could easily see double-digit annual earnings-per-share growth. For example, analysts on average expect BDX to increase earnings-per-share by 19% in 2016.

Final Thoughts

BDX has a below-average dividend yield. Its 1.6% dividend yield falls below the 2% average dividend yield in the S&P 500.

As a result, BDX stock may not be attractive for investors who desire lots of income right now. But is is a much more attractive stock pick for dividend growth investors.  The company offers above average total return potential.

BDX’s combination of a reasonable valuation, above average total return potential, a low payout ratio of around 30%, and low stock price volatility due to its consistent results give it a top 30 rank using The 8 Rules of Dividend Investing.