Across the pond, there's a medical devices company well worth taking a look at.
The global demand for healthcare is going to increase quite dramatically during the next few decades, thanks to the combination of an ageing population in the developed world and growing consumer incomes in the developing world.
Many British investors invest in the sector by focusing upon the pharmaceutical giants AstraZeneca (LSE: AZN) and GlaxoSmithKline (LSE: GSK), as well as the only pure medical devices manufacturer in the FTSE 100 index, Smith & Nephew (LSE: SN).
To diversify any further, investors have to consider Smiths Group (LSE: SMIN), a global engineering company with a sizeable medical devices arm, smaller companies like Immunodiagnostic Systems Holdings (LSE: IDS) or look outside the UK.
I prefer to consider the world's largest healthcare market, America, which has many healthcare companies including the New Jersey-based Becton, Dickinson and Company (NYSE: BDX.US).
It's good enough for Terry Smith
Becton, Dickinson gets the occasional mention on this side of the pond, most recently in my colleague Maynard Paton's article about Terry Smith's Fundsmith operation, where he noted that it was one of Smith's top ten holdings.
Since Smith is well known for his outspoken criticism of some of the financial services industry's practices, and is a popular character with many Fools as a result, the fact that he likes this company will no doubt have interested some investors.
Low PEG
Becton, Dickinson is often compared to Smith & Nephew because it, too, is a medical devices company. I'll look at its finances a bit later, but for now I'll just mention that its shares trade at a price-to-earnings (P/E) ratio of 13.6, while earnings per share (eps) have grown by 13.5% per annum over the last five years.
So Becton, Dickinson has a PEG ratio (price-earnings to growth) of just over one, which many investors take to be the sign of a possible bargain. Especially when the eps growth has occurred over several years, as is the case here.
The business
Becton, Dickinson was founded in 1897 by Messrs Becton and Dickinson in the small town of Franklin Lakes, where its headquarters are based. Arguably, the company's greatest claim to fame is for inventing the disposable syringe in 1954 specifically for Dr. Jonas Salk's mass immunisation programme against polio.
Its business is split into three divisions, the largest being Medical, which produces a wide variety of surgical equipment and drug-dispensing systems. The other two are Diagnostics, which deals in analytical and diagnostic systems, and Biosciences, which manufactures laboratory tools and reagents.
Becton, Dickinson does business in some 50 countries and over 60% of its sales come from outside the USA. Like many healthcare companies it sells to both state and private hospitals, other healthcare institutions and the general public. It's quite likely if you've ever spent much time in a hospital that some of its products were used in your treatment.
Why I like healthcare companies
In many cases the demand for healthcare tends to be fairly price-insensitive, particularly when the consumer isn't paying the bill, as is the case with Britain's National Health Service or where an insurance company is picking up the tab and can pass it on via everyone's premiums.
While governments around the world are trying to keep a lid on healthcare costs, if people can't get the state to provide their healthcare then they are quite likely to spend their own money to provide it for themselves. To my mind, this provides a strong justification for investing in the healthcare sector.
Show me the money
I've summarised Becton, Dickinson's key figures for the last six years in the table below. Please note that the turnover and pre-tax profits are in millions of US dollars, while the eps and dividends are in dollars.
| | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 |
|---|
| Turnover | 7,828.9 | 7,372.3 | 6,986.7 | 6,897.6 | 6,121.1 | 5,738.0 |
| Pre-tax profits | 1,716.3 | 1,661.2 | 1,578.6 | 1,489.7 | 1,151.7 | 1,125.9 |
| Earnings per share | 5.72 | 5.02 | 4.85 | 4.41 | 3.33 | 3.04 |
| Dividend | 1.64 | 1.48 | 1.32 | 1.14 | 0.98 | 0.86 |
This is one of the most impressive sets of results that I've seen in the last few years, particularly since the worst global recession since World War Two happened right in the middle of it. They illustrate both the defensive nature of its businesses and its capacity for strong growth.
Some of the improvement in eps has come from buying its own shares, though the effect is not particularly substantial as Becton, Dickinson generally restricts its buybacks to about 1% of its shares every year.
A quick comparison
As I write this Becton, Dickinson's shares are trading at $77.72, which puts them on a historic P/E of 13.6. The annual dividend was recently increased to $1.80, which represents a net yield of 2% to British taxpayers after withholding tax. Nothing leaps out at me from its balance sheet that I'd be concerned about.
In comparison, Smith & Nephew shares at 613.5p are on a historic P/E ratio of 13.8 where they yield 1.7%.
As you can see from the turnover figures in the table above, Becton, Dickinson is quite a sizeable company and its market value isn't too far off being double that of Smith & Nephew.
I view Becton, Dickinson as being the sort of company that I'm perfectly happy to buy and tuck away for the medium term, buying more as and when funds become available.
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More from Tony Luckett:
> Tony owns shares in AstraZeneca, Becton, Dickinson and Company, GlaxoSmithKline and Smith & Nephew. The Motley Fool owns shares in AstraZeneca, GlaxoSmithKline and Smith & Nephew.
