YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

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In the first quarter of the year, we sold out of our position in Covidien, a healthcare company known for their surgical instruments, as we believed it had reached our fair value estimate. This past quarter, we have essentially reinvested the proceeds from that sale into Becton, Dickinson & Co (ticker: BDX). Headquartered in New Jersey, BDX, like Covidien, is a medical company engaged in the manufacture and sale of a broad range of medical supplies, devices, laboratory equipment and diagnostic products used in hospitals, doctors’ offices, research labs, and even at home. Currently, BDX has a strong global presence with 60% of their sales overseas. These revenues can be broadly categorized into three main segments: medical, diagnostics, and biosciences.

The core of BDX is their medical division (52% of revenues) which includes hypodermic needles and syringes, insulin syringes, surgical blades and scalpels, and other such disposable medical gear. Their reputation for innovation continues as they have successfully developed safety engineered needles, most recently launching the world’s smallest “pen needle.” The disposable nature of their non-discretionary products provides an attractive recurring revenue stream which has allowed BDX to grow revenues in spite of recent hospital spending cuts. The diagnostics unit (31% of revenues) produces devices designed for collecting and transporting blood and other diagnostic specimens, and produces instruments for culture analysis and disease screening. Finally, the biosciences segment (17% of revenues) provides products to facilitate medical researchers, such as systems for cell sorting and analysis.

Over the years, BDX management has developed a reputation for allocating their capital wisely. Not only have they proven to achieve high returns on invested capital, but they also have a great record of focusing on returning cash flow to shareholders. In addition to the steadily increasing dividend, they remain committed to returning about $450-550 million annually to shareholders via stock repurchases. This combination of dividends and stock repurchases comprises 60-80% of their free cash flow.

From a valuation standpoint, the last time BDX traded at such low multiples was 1993, when the Clinton administration was striving to nationalize healthcare. We believe now is a great opportunity to scoop up shares of a very high-quality, recession resistant company.

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Brian Yacktman | June 30, 2010 | Permalink

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