Danaher (DHR) is a buy for the total return growth investor. Danaher is one of the largest manufacturers and distributors of medical, industrial, and commercial products. The last dividend increase declared in February 2020 was an increase from 0.17/Qtr. to 0.18/Qtr., a 6% increase. For the last five years, the dividend growth rate is 17% making up a bit for the low yield.
Danaher is 1.6% of The Good Business Portfolio (a starter position). The company has good long-term growth and has the cash it uses to increase the dividends each year.
As I have said before in previous articles:
I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am reviewing. For a complete set of guidelines, please see my article “The Good Business Portfolio: Update to Guidelines, March 2020”. These guidelines provide me with a balanced portfolio of income, defensive, total return, and growing companies that hopefully keeps me ahead of the Dow average.
When I scanned the five-year chart, Danaher has a good chart going up and to the right for 2016-2020 YTD in a strong pattern. Danaher is fairly priced and is expected to have above-normal growth for at least three quarters until the pandemic is controlled, then back to the normal good growth.
Fundamentals and company business review
The method I use to compare companies is to look at the total return, as shown from my previous articles in the section below:
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the Good Business Portfolio’s objective. My total return guideline is that total return must be greater than the Dow’s total return over my test period. Danaher beat strongly against the Dow baseline in my 58-month test compared to the Dow average. I chose the 58-month test period (starting January 1, 2016 and ending to date) because it includes the great year of 2017 and 2019 and other years with fair and bad performance.
The great Danaher total return of 247.36% compared to the Dow base of 57.9% makes it a great investment for the total return investor that also wants some increasing income. Looking back five years, $10,000 invested five years ago would now be worth over $34,900 today. This gain makes Danaher a great investment for the total return investor looking back, which has future growth as the United States economy continues to grow and needs more of the company’s medical and industrial products during this pandemic.
Dow’s 58-Month total return baseline is 57.90%
Danaher does not meet my dividend guideline of having dividends increase for 8 of the last 10 years and having a minimum of 1% yield. Danaher has a below-average dividend yield of 0.32% and has had increases for 8 years, making Danaher a poor choice for the dividend growth investor. The dividend was increased in February 2020 for an increase from $0.17/Qtr to $0.18/Qtr or a 6% increase. The 5-year average payout ratio is low, at 15%. After paying the dividend, this leaves cash remaining for increasing the business of the company by buying bolt-on companies and developing new additions to the company’s product line.
I also require the CAGR going forward to be able to cover my yearly expenses and my RMD with a CAGR of 7%. My dividends provide 3.3% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.2% plus an inflation cushion of 1.8%. The 3-year forward S&P CFRA CAGR of 13% exceeds my guideline requirement. This good future growth for Danaher can continue its uptrend benefiting from the continued strong growth in the United States economy.
I have a capitalization guideline where the capitalization must be greater than $10 Billion. Danaher easily passes this guideline. Danaher is a large-cap company with a capitalization of $161 billion. Danaher 2020 projected cash flow at $4.3 billion is good, allowing the company to have the means for company growth each year. Large-cap companies like Danaher have the cash and ability to buy other smaller companies and weather any storms that might come along. The graphic below shows the strong gain in cash flow.
Source: 3rd Quarter earnings call slides
One of my guidelines is that the S&P rating must be three stars or better. Danaher’s S&P CFRA rating is three stars or hold with a recently raised target price to $238, passing the guideline. Danaher’s price is below this target by 0.2%. Danaher is below the target price at present and has a high forward P/E of 31, making Danaher a good buy for the momentum investor. Considering the company’s potential growth, if you are a long-term investor that wants good increasing future total return growth, you may want to look at this company.
One of my guidelines is would I buy the whole company if I could. The answer is yes. The total return is strong, but the below-average dividend makes Danaher a good business to own for the growth investor but not the income investor. The Good Business Portfolio likes to embrace all kinds of investment styles. Still, it concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business, and generates a good income stream. Most of all, what makes Danaher interesting is the long-term demand for medical-related supplies that are needed for the growing senior citizen population, and the present pandemic is a strong plus for the company.
I don’t have a guideline for earnings but look for my positions’ earnings to consistently beat their quarterly estimates. For the last quarter on October 22, 2020, Danaher reported earnings that beat expected by $0.36 at $1.72, compared to last year at $1.06. Total revenue was higher at $5.88 billion more than a year ago by 16.7% year over year and beat expected total revenue by $370 million. This was a great report with bottom-line beating expected and the top line increasing with a good increase compared to last year. The next earnings report will be out in late January 2021 and is expected to be $1.82 compared to last year at $1.07, a great increase. The graphic below shows the earnings comparison between 2020 and 2019.
Source: 3rd Quarter earnings call slides
Danaher is one of the largest manufacturers and marketers of professional medical and industrial products in the United States. Research and development, manufacturing, sales, distribution, service, and administrative facilities are located in over 60 countries
DHR is in the right business of supporting the medical sector with excellent products that have increasing need as the senior citizen’s percentage grows in the world. The good earnings and revenue growth provides DHR the capability to continue its growth as the cash flow increases with the General Electric (GE) division buy. The graphic below shows the progress of the existing Life sciences division that will grow even bigger as the GE addition integrates into the company.
Source: 3rd Quarter earnings call slides
From the 3rd quarter’s earning call, EPS growth, and year-over-year free cash flow were extremely good. This strong performance is focused on executing for their customers during the COVID-19 pandemic. Since the beginning of the pandemic, they have met the challenges presented and turned them into impactful opportunities to support patients, customers, and the global community. Cepheid continues to be a leader in the global diagnostic testing effort, and the company’s commitment to tackle the global health crisis was further demonstrated by the recent launch of rapid 4-in-1 combination tests for COVID-19, Flu A, Flu B, and RSV from a single patient sample.
The symptoms for each of these viruses are very similar, but the treatments differ greatly. This test will provide clinicians with critical answers in approximately 35 minutes to ensure the best patient outcome. They generated $1.5 billion of free cash flow in the quarter and $3.5 billion year-to-date, up 110% and 59%, respectively, with 174% free cash flow to net income conversion in the quarter. Danaher will continue to outperform through the remainder of 2020 and well into the future.
This shows top management’s feelings for the continued growth of the Danaher business with an increase in future growth. Danaher has good constant growth and will continue as the United States and worldwide economies and populations grow. The growth is being driven by buying Bolt-on companies, like the GE acquisition adding to its existing services and products and the increase in revenues due to the COVID-19 pandemic.
Danaher is a good investment choice for the total return growth investor. Danaher is 1.6% of The Good Business Portfolio and will be added too as cash is available. If you want a growing total return in a defensive business, DHR may be the right investment for you. The entry price right now is slightly below the one-year forward expectation. Long-term investors may want to consider this good business and buy this great company.
The total return for the Good Business Portfolio is ahead of the Dow average from 1/1/2020 to October 23 by 0.72%, which is a small gain above the market loss of 0.7% for the Dow with Boeing (BA) a strong drag but getting better. Each quarter after the earnings season, I write an article giving a complete portfolio list and performance. The latest article is titled “ The Good Business Portfolio: 2020 2 nd Quarter Earnings and Performance Review.” Become a real-time follower, and you will get each quarter’s performance for my portfolio companies after this earnings season is over.
Disclosure: I am/we are long BA, JNJ, HD, EOS, DHR, MO, DIS, V, OHI, TXN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions of the companies are my own.