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Becton, Dickinson Expected to Continue to Reward Shareholders

- By Barry Cohen

Medical device companies need to focus on value and disease prevention or their products risk becoming commodities, according to a recent report by consulting firm KPMG. The companies that are successful will capture the lion's share of a worldwide market that is expected to grow at a 5% annual pace, reaching $800 billion by 2030.


Several companies were cited for forward thinking for making their products "smarter" through linkups with data providers. One is Zimmer Biomet Holdings Inc. (ZBH), an Indiana-based provider of musculoskeletal health care products and solutions. The $8 billion company is employing the engagement app from technology company HealthLoop to support and educate joint-replacement patients. Investors hope this and other initiatives will eventually be reflected in Zimmer's share price, which, at $105, is just above its 52-week low.

Fresenius Medical Care AG & Co. (FMS) was singled out as one of the device manufacturers offering a variety of services that augment its products. In addition to being the world leader in producing hospital dialysis machines, the company operates a chain of more than 3,500 dialysis centers.

Something is needed to shake German-based Fresenius out of the doldrums. Its share price of $35 is just about where it was five years ago. Maybe there's an investment opportunity here. The company trades at a modest price-earnings ratio of under 10 and two out of four analysts have it as a strong buy with an average price target of more than $46.

The KPMG report had high praise for Medtronic PLC (MDT), the world's largest medical device company. It said, "By embracing reinvention, the company continues to make fundamental shifts in its global business model." For example, Medtronic has partnered with Fitbit (FIT) to track diabetes patients and with IBM Watson (IBM) on a diabetes app, among other innovative programs.

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Yet, Medtronic has been somewhat of a disappointment to investors. In the past five years, its share price is up about 55% compared to a 125% gain in the iShares U.S. Medical Devices (IHI) exchange-traded fund. Perhaps better days are ahead. Of 24 analysts covering the company, 11 rate it a buy or strong buy.

Although the outlook for medical device companies is bright, investors need to consider some substantial challenges facing the industry before taking the plunge. For one, it's not known whether the medical device tax will be fully repealed. And trade tariffs could negatively impact the industry.

At least in the short term, Moody's doesn't seem fazed by these concerns. In a recent article on MedTech Dive, the credit ratings agency said the industry should enjoy solid gains in earnings from new products and growing demand in emerging economies. Moody's thinks Becton, Dickinson & Co. (BDX) should benefit from its $24 billion acquisition of C.R. Bard last year. U.S. News & World Report is also optimistic about the company, naming Becton one of its top 10 health care stocks for 2019.

Becton has raised its dividend for at least 25 consecutive years and has been increasing its annual payout even longer than that. The company's shares have doubled in the past five years and 11 out of 14 analysts have it as a buy or strong buy.

Moody's also thinks growth at Abbott Laboratories (ABT) will be boosted by demand for its FreeStyle Libre blood glucose monitor and its MitraClip device for transcatheter mitral heart valve repair.

Other medical device companies that bear investor attention are Siemens Healthineers AG. (XPAR:SHL), Johnson & Johnson (JNJ), Stryker Corp. (SYK), Baxter International Inc. (BAX), Boston Scientific Corp. (BSX) and France's Essilorluxottica (EL.PA).

Disclosure: The author owns a position in JNJ.

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This article first appeared on GuruFocus.