I love exploring the financials of little-known companies out there that have excellent fundamentals, yet investors pay little attention to them or their stock.
Take C.R. Bard, Inc. (BCR) for instance.
This “Dividend Champion” on David Fish’s Dividend Champions, Contenders, and Challengers list has increased its dividend for the past 43 consecutive years.
You don’t build up a track record of that kind of excellence without doing a lot of things right.
And this company clearly gets a lot right.
[ad#Google Adsense 336×280-IA]C.R. Bard, Inc. designs, manufactures, and distributes a variety of medical, diagnostic, and surgical devices and tools.
The great thing about C.R. Bard’s business model reminds me of the old “razor blade model” where they sell a number of products that are designed for limited usage.
This ensures a steady stream of recurring revenue, assuming the clients continue to buy their goods from BCR.
The company offers more than 15,000 products that stretch the gamut of vascular, urology, oncology, and surgical. Some of their products include stents, catheters, drainage systems, and specialty tubes.
Their sales are spread out across the following five segments: Oncology (28% of fiscal year 2013 sales); Vascular (27%); Urology (25%); Surgical Specialties (16%); and Other (3%).
So we’ll take a look at the company’s operational results over the last 10 years which will give you some indication as to the quality of this company. Their fiscal year ends December 31.
Revenue increased from $1.656 billion in fiscal year 2004 to $3.020 billion at the end of FY 2013. That’s a compound annual growth rate of 6.90%.
Earnings per share grew from $2.82 to $8.39 during this period, which is a CAGR of 12.88%. I always find growth rates in the low double digits as pretty impressive and attractive, and BCR doesn’t disappoint here.
S&P Capital IQ anticipates EPS will grow at a compound annual rate of 11% over the next three years, which seems more than reasonable to me.
Looks like we have some excellent revenue and EPS growth here, but are they sharing some of the profit pie with shareholders?
Well, I mentioned earlier that they have an esteemed 43-year track record of dividend increases, which is pretty phenomenal.
That puts them in the same league as a number of well-known blue-chip stocks.
However, the dividend increases themselves are a bit disappointing. Over the last decade, they’ve increased their dividend by an annual rate of 6.2%.
Your deduction skills will probably tell you that a dividend growth rate that much lower than the growth rate in EPS would lead to a low payout ratio, and you’d be right: The payout ratio stands at a lowly 8.5%. That’s one of the lower payout ratios I’ve come across, which leaves plenty of expansion room for the dividend.
One negative aspect of this stock from my perspective is the yield, at only 0.53% here. I generally avoid stocks with a yield below 2.5% since there’s little current income to be had, but I’ll occasionally make exceptions for stocks with big dividend growth rates.
Of course, this rule might be to my detriment: BCR is up more than 104% over just the last five years.
BCR’s balance sheet is solid. The long-term debt/equity ratio was 0.67 at the end of the last fiscal year, while the interest coverage ratio is 28. All in all, low leverage and a lot of flexibility here.
One aspect of this company that I find particularly compelling is its profitability. Net margin was 22.62% last fiscal year, while return on equity was 34.37%. Mighty impressive!
I love the healthcare space. The tailwinds are obvious, especially with the changing demographics here in the US. Even better, BCR is internationally diversified, with approximately 33% of their revenue being generated from international markets. Combine a growing sector with a business model predicated on disposable products and you have a recipe for outstanding returns.
This is a $12.5 billion company, so it’s not small. However, it’s also not extremely large either. I think there’s plenty of growth potential ahead for this company, as life expectancy across the globe is expected to continue to rise and access to healthcare is also increasing across emerging markets.
However, risks should be considered here. Primarily, their products open them up to litigation, recalls, and obsolescence. So innovation and acquisitions are both extremely important to this company. Overall, however, I believe BCR is a low-risk investment based on the industry they serve and the breadth of products they offer.
Shares in BCR are offered at a P/E ratio of 16.22 right now. That’s below both the broader market’s P/E ratio as well as BCR’s five-year average. Shares appear to be trading at a fair value or better based on the P/E ratio, especially considering the growth potential.
I usually offer a dividend discount model analysis to fairly value a stock, but it’s difficult to accurately model a valuation for a stock with both a low yield and a somewhat low dividend growth rate using the DDM analysis. So I chose to use a discounted cash flow model analysis with BCR, using a 10% discount rate and a 4% growth rate in perpetuity. That gives me a fair value of $184.71 on shares right now, which seems to correspond to the approximate discount in the P/E ratio from its 5-year norm.
Bottom line: C.R. Bard, Inc. (BCR) is a high-quality medical devices firm, offering a plethora of devices that are designed for one-time use. This provides a source of recurring revenue for the company to continue raising dividends for its shareholders, which means that the impressive dividend growth streak will only likely become more impressive over time. The low yield and low dividend growth rate probably falls outside the scope of most investors’ needs, including my own. But this is a company that shouldn’t be ignored, as it sports some excellent fundamentals across the board. Furthermore, the valuation seems to offer a solid entry point right now.
— Jason Fieber, Dividend Mantra
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