Are Becton, Dickinson and Company’s (NYSE:BDX) Fundamentals Good Enough to Warrant Buying

It is hard to get excited after looking at Becton Dickinson’s (NYSE:BDX) recent performance, when its stock has declined 4.5% over the past week. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Becton Dickinson’s ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company’s success at turning shareholder investments into profits.

View our latest analysis for Becton Dickinson

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Becton Dickinson is:

5.1% = US$1.3b ÷ US$25b (Based on the trailing twelve months to December 2023).

The ‘return’ is the income the business earned over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.05.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

Becton Dickinson’s Earnings Growth And 5.1% ROE

On the face of it, Becton Dickinson’s ROE is not much to talk about. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 11% either. Becton Dickinson was still able to see a decent net income growth of 14% over the past five years. We reckon that there could be other factors at play here. Such as – high earnings retention or an efficient management in place.

Next, on comparing Becton Dickinson’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 14% over the last few years.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is BDX fairly valued? This infographic on the company’s intrinsic value has everything you need to know.

Is Becton Dickinson Using Its Retained Earnings Effectively?

While Becton Dickinson has a three-year median payout ratio of 67% (which means it retains 33% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn’t hampered its ability to grow.

Besides, Becton Dickinson has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 25% over the next three years. As a result, the expected drop in Becton Dickinson’s payout ratio explains the anticipated rise in the company’s future ROE to 15%, over the same period.

Summary

In total, it does look like Becton Dickinson has some positive aspects to its business. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.