What really got me interested in this company was in-depth presentation on Becton Dickinson by East Coast Asset Management published in Seeking Alpha by Market Folly. They basically argue that the company is worth $90-$95 a share. This range comes from several valuation methods, which I won't dive into here. It is worth to mention that valuation using 8% discount rate and assumption of no growth in free cash flow gives valuation of $65.
At first look BDX does not appear to be very cheap (P/E 13,6 and P/B 3,1). However, I tend to keep in mind a quote from Buffett: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price". I think this actually comes from Charlie Munger, who introduced this thinking to Buffett at some stage. At any rate, after reading the East Coast paper and looking into the company, I can understand why Berkshire has a position in this company.
In short:
- steady increase in demand is there making it hard to believe that company can not increase free cash flow
- company has multiple competitive advantages
- margins are excellent and have been improving last 5 years
- ROE average over last 5 years is 22.2%
- 37 consecutive years of dividend increases
- the company has been purchasing it's shares back using more money per year than for dividends. Therefore, the current not-so-high dividend yield has great potential to rise also in the future (in 2009 the company used 550 MUSD for share repurchase and 317 MUSD for dividends). The company could easily pay dividend which would give over 5% yield at $70 share price.
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