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Stock Analysis - Danaher Corp (DHR)

Initial Screening

Danaher Corp may not ring a lot of bells when you first hear the name. It probably also slips through the cracks of many investors’ screening criteria, but you’re looking at a company that has consistently outperformed the S&P 500 over the last 30 years.

So what does this company do? As a conglomerate holding company similar to Berkshire Hathaway, Danaher Corp focuses on mergers and acquisitions in the healthcare and environmental sectors. To achieve their performance they use an active approach pairing mergers and acquisitions with spinoffs. The current Danaher portfolio consists of 24 holdings.

Danaher's latest notable transactions were splitting (not spinning) off their dental assets into Envista Holdings (NYSE: NVST) in 2019 and acquiring the BioPharma business of General Electric in March 2020. As this was a split, shareholders had the option to acquire stocks of the new holding company for a discount, different from a spin-off in which they would receive shares of the new company.

Danaher’s peer group consists of other big conglomerates such as Berkshire Hathaway (NYSE: BRK-A / BRK-B) and Honeywell (NYSE: HON) which have comparable business structures but do focus on other sectors. This peer group is assembled under the assumption that you are comparing conglomerates. Depending on the websites you may use for your research, Danaher is also often compared to companies developing and selling medical devices only.

Caterpillar Infographic
 

Business Model

Danaher Corp acquires highly specialized small to medium-sized companies and applies their very own Danaher Business System (short: DBS) to move their business forward. This system is driven by Danaher’s core values to achieve success which starts with people and ends with performance. They then believe that superior performance will attract further talent and the cycle starts again, constantly improving the way they do business.

Danaher is highly specialized and focused on innovation in three major business units: Diagnostics, Life Science, and Environmental and Applied Solutions. These units are in very future-proof fields as healthcare and environmental solutions will be needed for decades to come, whether it’s the growing aging population or tackling climate change and its impact on everyday life.

Below you can find an overview of Danaher's Segment Revenue and Results from Danaher's 2019 Annual Report:

Danaher Revenue 2019
 

This graphic illustrates each of the business units' global footprint as well as figures to show stability the company offers through recurring revenue.

Dividend Growth and Sustainability

Danaher’s current dividend yield as of 01/05/2021 is 0.31%, a low starting point and below their 5-year average yield of 0.55%.

The following section will cover some history on and judge the sustainability of Danaher’s dividend by examining the payout ratio as well as its growth to determine whether the conglomerate makes a compelling case for dividend growth investors.

Dividend History & Growth

Danaher has paid a quarterly dividend since 1993 and has steadily increased it since 2014. The 7 years of consistent dividend growth award the company the status of a US Dividend Challenger (Companies with Dividend Growth streaks between 5 and 10 years).

Reflecting on the last decade, between 2011 and 2021, the dividend per share has been increased by 700%, with the latest dividend increase being announced on Feb 20, 2020. You may think that his high growth rate would lead to a high yield, but shares of Danaher Corp equally appreciated in price leading to a current starting yield of only 0.32%.

As a dividend growth investor, you will have to ask yourself about your investing horizon and if the high growth of Danaher's dividend is worth it considering the very low starting yield.

Payout Ratio

Between 2011 and 2021, Danaher’s dividend payout ratio has remained below 20% with a lot of room to grow the dividend based on their earnings. From a payout ratio standpoint alone I would consider the dividend as safe but due to the nature of the business Danaher needs to retain some of their earnings for future mergers and acquisitions to drive their business.

Financial Snapshot

Using the Piotroski F-Score to measure Danaher Corp’s current financial health, we see it secures a 6 in the 0-9 ranking. This rating is slightly above average for similar healthcare conglomerates in this sector.

From a debt perspective, the debt to equity ratio for Danaher is around 50% which I would consider normal for a company focused on merger and acquisition activities. Even with adding around 10b USD of debt since the middle of 2019 the company’s debt to equity ratio did not grow significantly.

Furthermore, the short term liabilities are well covered by their short-term assets and operating cash flow. Adding to that the interest payments are covered considering a 36x coverage-rate by EBIT which is considerably good.

Investment Case

In the following section, we will dive into the company's Moat as well as Bull and Bear cases to outline which headwind the company might face while providing insight into their strategy and growth opportunities.

Moat

Danaher does not offer a wide moat but its rather small moat derives from their very successful Danaher Business System. The system has been implemented in the mid-1980s to continuously drive performance, processes, and culture to lead to exceptional value and can be seen as a competitive advantage over other conglomerates.

The Bull Case

Danaher Corp is focused on innovation and can look back on a number of successful acquisitions over the last 30+ years. The focus on healthcare (Life Sciences + Diagnostics) and environment positions the company in a very future-proof market.

Healthcare is always evolving and is expected to grow around 5% each year as per the 2020 Global Healthcare Outlook by Deloitte. Main drivers for the growth will include aging and growing populations around the globe as well as the costly infrastructure and growing demands for a broader ecosystems.

On the environmental side, Danaher not only optimizes the supply chain but also owns companies focused on water quality. Whether it’s for consumers or agriculture, both are important pillars of our everyday life.

The Bear Case

The strongest bear case derives from its valuation. At a current P/E ratio of just over 50, it is very expensive and even more expensive than big tech conglomerates like Microsoft and Apple. It has to be seen whether the valuation can be justified with growth in the post-pandemic economy.

As with every international business, Danaher’s operations are exposed to foreign currency risk and geopolitical issues as well as regulatory entities, especially in the Healthcare sectors. Changes in politics, regulations, or laws could potentially impact the business of Danaher Corp.

Conclusion

With a 50.9 PE Ratio, Danaher is very richly valued but looking at the whole sector, the US Medical Equipment industry has currently an average PE ratio of 53.1. Despite the valuation, I would consider increasing my position at the current levels since the combination of dividend growth and capital appreciation paired with their long success stories make for an interesting investment case.

There are a couple of companies that seem to never go on sale (Roper Technologies NYSE: ROP comes to mind) and Danaher fits right in this spectrum. In my honest opinion, I see a bright future for this company given the amount of innovation and potential in the healthcare and environmental sector.

As always, I recommend potential investors browse through the documents found on Danaher’s investor relations page as a great start for your due diligence.

Thank you for taking a look at my stock analysis of Danaher Corporation. I invite you to share any feedback you have to offer to help me improve future stock analysis and research!

Disclaimer

I do hold a position in Danaher Corporation (NYSE: DHR). In 2020 it has emerged as one of my biggest holdings in the healthcare sector. While it offers a very low starting-yield it fits my dividend growth portfolio and offers a great entry point in various industries of the healthcare sector.

This article expresses personal opinions and observations of someone who is not licensed to provide financial advice.

I am not receiving compensation for writing this analysis and have no business relationship with any company whose stock is mentioned in this article other than the long positions I own. Furthermore, I cannot guarantee the accuracy of the financial metrics gathered from 3rd party services like Morningstar and Yahoo Finance.

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