C.R. Bard (BCR): Over 40 Consecutive Years of Dividend Growth & Recession-Resistant Products

C.R. Bard (BCR) is a member of the dividend aristocrats list that has nearly doubled the market’s performance over the last decade.

The company’s dependable business model has resulted in steady earnings growth and dividend increases.

We love buying these types of companies for our Top 20 Dividend Stocks portfolio, but let’s take a closer look to see if Bard makes the cut.

Business Overview

Bard was founded in 1907 and sells more than 15,000 medical, surgical, and diagnostic devices to hospitals and other healthcare institutions. Its products include catheters, stents, ports, grafts and more and primarily focus in the disease areas of vascular (28% of sales), urology (25%), oncology (27%), and surgical specialties (17%). Most of Bard’s medical products are intended to be used one and then discarded, which results in a steady base of revenue.

By geography, about 30% of Bard’s sales take place outside of the U.S., including 10% in emerging markets.

Business Analysis

Bard’s management team has done an excellent job positioning the company’s product portfolio in areas that are priced on value rather than cost.

The company focuses on under-served markets where it can win business by offering more innovative products that deliver better clinical outcomes.

Customers demand extremely high quality and reliability because they use Bard’s medical devices for some of the most demanding and sensitive areas of healthcare.

For example, some of Bard’s products are implanted in seriously ill patients indefinitely – care providers cannot afford for anything to wrong with the device, and Bard has built a reputation for quality over the 100+ years it has been in business.

Most of Bard’s products are also patented, and the company invests over $250 million in research and development activities each year (7-8% of its annual sales) to develop competitive new products such as drug-coated balloons.

Many of the areas Bard focuses on are also characterized by complex regulatory requirements, which help limit competition in some cases.

As a result, over 75% of Bard’s 2015 sales were from products that held a number one or two market share position.

Bard also benefits by being well diversified by product type. The company would not be at risk if any one of its products went away due to new competition or a change in regulations. Many of its products are also recession-resistant because ill patients need to be treated no matter what.

Bard is also investing in faster-growing markets. The company has about a third of its sales reps located in emerging markets, although these regions only account for 10% of Bard’s sales today. The company also has a history of making acquisitions to gain access to new products, technologies, and geographies.

After making a deal, Bard can plug its new products into its extensive distribution network to scale the business and improve its customer relationships by offering an even broader product portfolio.

Management is playing the long-term game and has shown competence with their recent strategic moves as well. Bard embarked on a new strategic plan over three years ago to improve its organic growth rate, which was about flat at that time. Today, the company expects organic sales growth in the mid-single digits in 2016.

Overall, we believe Bard is a high quality business. It sells a broad lineup of patent-protected products that require years of R&D spending and successful clinical trials and regulatory outcomes. Bard’s medical devices are used in critical medical treatments and procedures, and the company has established a well-known and trusted brand for more than 100 years.

While the healthcare industry is undergoing significant change, Bard seems like the type of company that can successfully power through.

Bard’s Key Risks

The healthcare landscape is rapidly evolving in the U.S., and medical device manufacturers such as Bard must successfully adapt to remain competitive.

Hospitals are increasingly focused on consolidating the number of suppliers they do business with to streamline their costs. As their purchasing power increases, price pressure increases on medical device manufacturers. Smaller suppliers will likely be forced to consolidate as a result, and many of Bard’s markets seem likely to remain fiercely competitive.

Government reimbursement programs pose another risk. Many of Bard’s customers use funds from Medicare and Medicaid to pay for a substantial portion of their medical device purchases. As we noted with HCP, changing reimbursement models as a result of healthcare reform can significantly alter the profitability and demand of healthcare products and services.

Bard’s diversification by customer, disease area, and product help diversify away some of this risk, but there’s no telling how the future might play out with healthcare regulations and reimbursements. The good news is that healthcare reform in the U.S. has resulted in millions of Americans getting insurance coverage, which results in additional demand for medical devices.

Healthcare reform has also brought new taxes to the medical device industry. Starting in 2013, the medical device industry was required to subsidize healthcare reform by paying a 2.3% tax on U.S. sales of medical devices. However, the tax was recently suspended for 2016 and 2017.

Bard must navigate the changes caused by healthcare reform and continue investing in innovation to stay ahead of the fast pace of change in many of its medical device markets. However, the company seemingly has the financial health, track record, business diversification, and expertise to remain relevant for a long time to come.

Dividend Analysis: Bard

We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. Bard’s long-term dividend and fundamental data charts can all be seen by clicking here.

Dividend Safety Score

Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

Bard’s dividend is rock solid with a Dividend Safety Score of 97. Bard’s free cash flow payout ratio over the last 12 months is just 10%, which has been fairly consistent with the company’s past 10 fiscal years (see below).

Bard has plenty of flexibility to continue paying and growing its dividend, but the company has instead reinvested in the business with acquisitions and repurchased more than 25% of its diluted shares outstanding over the last 10 years.

Source: Simply Safe Dividends

Another factor helping Bard’s high Dividend Safety Score is the company’s strong performance during recessions. Bard’s sales grew by 3% in 2009, and its free cash flow increased each year during the recession. Sick patients still need treatment during economic downturns, which is one reason why healthcare is one of the best stock sectors for dividend income. Bard’s stock also fared well during 2008 and outperformed the S&P 500 by 26%.

Source: Simply Safe Dividends

Bard has also been a free cash flow machine. Free cash flow allows a company to sustainably pay a dividend, repurchase shares, reduce debt, and acquire businesses to create shareholder value. The consumable nature of Bard’s products and their high-value applications allow the company to generate healthy cash flows.

Source: Simply Safe Dividends

Analyzing a company’s return on invested capital provides clues about a company’s moat and ability to generate economic value for its capital providers. Bard has delivered strong returns of about 20% for most of the last 10 years (recent years were weighed down by accounting noise). By focusing on profitable niches and developing protected medical devices, Bard has developed strong competitive advantages.

Source: Simply Safe Dividends

Bard’s balance sheet further strengthens the safety of its dividend. The company has about $1 billion in cash compared to just $1.1 billion in debt. To put it in perspective, Bard’s cash on hand covers nearly 15 years of dividend payments at the current rate.

Overall, Bard’s dividend payment is about as safe as they get. The company’s extremely low payout ratio, recession-resistant products, consistent free cash flow generation, strong return on invested capital, and healthy balance sheet

Dividend Growth Score

Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

Bard’s Dividend Growth Score of 73 indicates that the company has very strong dividend growth potential. The company is a member of the dividend aristocrats list and most recently raised its dividend by 9% in mid-2015. Bard has now raised its dividend for over 40 straight years and will be a dividend king in less than a decade.

As seen below, Bard has increased its dividend at a 6.3% annualized rate over the past decade. Bard could raise its dividend by a double-digit annual rate given its low payout ratio and healthy fundamentals, but management remains focused on reinvesting for growth.

For now, dividend growth seems likely to align with earnings growth, which we expect to be in the upper-single digits.

Source: Simply Safe Dividends

Valuation

BCR’s stock trades at 19.5x forward earnings estimates and has a dividend yield of 0.5%, which is somewhat below its five-year average dividend yield of 0.66%.

The company’s relatively low dividend yield reflects its focus on growth investments. Bard’s free cash flow per share has grown by 8.3% per year over the last five years, and we expect high-single digit growth to continue.

Under our assumptions, the company’s stock appears to offer total return potential of about 9-11% per year. We think Bard’s stock is about fairly valued today.

Conclusion

Bard appears to be an excellent business and an example of a blue chip dividend stock. However, the stock’s 0.5% dividend yield is just too low for us to get more excited about the investment today. While the stock isn’t appropriate for investors living off dividends in retirement, its total return potential could be appealing for investors maintaining a much longer time horizon.