The next selection for the Inflation-Protected Income Growth Portfolio is medical device titan Becton, Dickinson and Company . In spite of the fact that the company expects slower earnings growth as a result of the new medical devices tax levied as part of Obamacare, it recently raised its dividend by 10%.
That show of strength amid challenges is nothing new for the company, which has a history of raising dividends that stretches back for 41 consecutive fiscal years. When combined with a decent balance sheet and reasonable value, Becton Dickinson deserves a spot in this portfolio
Why it's worth owning in the iPIG Portfolio
To earn a spot in the portfolio, a company has to pass a series of tests related to its dividends, its balance sheet and valuation, and how it fits from a portfolio diversification perspective.
- Payment: Becton Dickinson's dividend currently sits at $1.98 a share, a yield of about 2.3% based on Friday's closing price.
- Growth history: The company has raised its dividend at least once per fiscal year for the past 41 years. In Dec. 2012, it boosted the payment by 10%, from $0.45 to $0.495 per quarter.
- Reason to believe the growth can continue: With a payout ratio of 32%, the company retains about two-thirds of its earnings to invest for future growth. That low payout ratio also gives the company flexibility to maintain its payment if that anticipated growth doesn't materialize as quickly as hoped.
Balance sheet and valuation:
- Balance sheet: A debt-to-equity ratio just above 1.0 indicates that Becton Dickinson does use debt, but it hasn't overleveraged itself to the point where a near-term financial hiccup would derail it.
Valuation: The company easily passes a valuation test pioneered by none other than Benjamin Graham, the founder of value investing. That said, Graham's equation does take interest rates into account, and today's low rates make stock values seem cheaper than they would be in a more normal rate environment. Still, even dialing rates back up to more "normal" levels, Becton Dickinson would still look decently priced.
The previous picks for the portfolio included:
- An industrial conglomerate
- A generic-pharmaceutical powerhouse
- A provider of staple foods
- An auto parts distributor
- A safety equipment provider
- A high-tech (software) titan
- A toy maker
- An electric utility
- A shipping company
- A pipeline giant (though this one might actually get away)
- A drugstore
- A semiconductor superstar
- A two-for-one railroad special
- A fast-food juggernaut
Like fellow iPIG portfolio pick Teva Pharmaceutical , Becton Dickinson is in the business of helping people with medical conditions, which means it's not perfect from a diversification perspective. Still, it's different enough, given that Teva's strength is its generic-drug business, while Becton Dickinson shines making devices and other equipment that help with testing, treatment, and care. It may not be perfect diversification, but it's all part of the balancing act needed to manage across risks in investing.
What are the risks?
Of course, no investment is without risk. In Becton Dickinson's case, for instance, Obamacare's tax on its products showcases a regulatory risk that makes its products more expensive for consumers and/or investors.
Additionally, the bigger a company gets, the easier it is for the company to miss out on innovations that fundamentally change the market. Smaller competitor ICU Medical , for instance, got its start and made its name filling niches in customization and safety that larger device players ignored. As a smaller, more nimble company, ICU Medical has more room for growth than its larger competition, but its lack of a dividend means it doesn't quite fit in this particular portfolio.
On the flip side, now that Abbot Laboratories has spun off its research-oriented pharmaceuticals business into AbbVie , the old Abbot is now much more focused. With medical devices a key part of Abbot's focus, Becton Dickinson may find itself against some very hungry and dedicated competition that had, until recently, been distracted by the internal mechanics of the split-up.
What comes next?
When the Fool's disclosure policy allows, I plan to buy Becton Dickinson's stock for the Inflation-Protected Income Growth portfolio, as long as it remains below $88 a share. I expect to invest around $1,500 -- a 5% allocation in the portfolio -- with 25% of the portfolio still remaining in cash. Watch my article feed for details of the next pick, coming soon.