Danaher

What does a river in Montana have to do with Kaizen & continuous improvement?

Admittedly, that's a bit of a strange question, isn't it? But don't worry, once you've read the article, you'll understand the connection. So today we're taking a look at the Danaher Corporation, or, as some shareholders actually claim, "the better Berkshire Hathaway". What's that all about?

Just like Warren Buffett's Berkshire Hathaway, Danaher is a conglomerate - a diversified group with countless subsidiaries operating in all sorts of industries. The more diversified a company is, the more easily it can absorb weak phases in individual areas. But the bigger you get, the harder it becomes for the board to manage everything. This is where Danaher has developed its own efficiency program that simply gets imposed on the subsidiaries - the DBS (Danaher Business System).

The history and business model of Danaher Corp.

It all started with a small Jewish orphan who was raised in a children's home in NYC. His name was Norman Rales, and he later became known as the owner of a successful construction company. When he sold his construction company in Washington D.C. to his employees, he quickly became very wealthy. As a philanthropist, he founded several charitable foundations together with his wife Ruth. But today isn't about the two of them, it's about 2 of their 4 children. Steven and Mitchell grew up in an upscale neighborhood in Pittsburgh, Pennsylvania. After graduating from university, both worked for their parents' company, which they left together in 1979 to stand on their own two feet. They founded Equity Group Holdings LLC to buy up companies with the help of highly speculative bonds.

Almost exactly 10 years earlier, in 1969, DMG Inc. was founded - a real estate firm that, among other things, set up the Massachusetts Real Estate Investment Trust (more on REITs here). However, business wasn't exactly booming, so after several restructurings it was bought up by the Rales brothers. The two then changed the name to Danaher Corporation in 1984. Danaher is a small river that flows into the Flathead River in Montana. The two brothers often went fishing on this trout-rich river. And this is where they ultimately came up with their vision of a manufacturing company dedicated to the Japanese Kaizen principle and continuous improvement.

The brothers had a simple method: they bought established brand-name companies that were currently going through a weak phase. After the purchase, they used their Danaher Business System to weed out a company's unproductive and costly processes, so that in the end only the value-creating part remained. In the beginning, the business portfolio mostly consisted of industrial manufacturing companies, but from the mid-'90s on, the focus shifted more toward faster-growing areas such as Life Sciences, Diagnostics, Dental and Environmental & Applied Solutions. Only in 2015 did Danaher announce that it would spin off many of its industrial businesses into the independent company Fortive. That was an important step, since it allowed them to concentrate even more on innovation and growth.

What's next for Danaher?

Danaher's executives will continue to keep an eye out for attractive acquisition opportunities and then optimize those companies with the DBS and trim them for effectiveness. That way, internal growth can be consistently fueled. But since a global science and technology innovator can't look after hundreds of companies at once, individual divisions will continue to be sold off in the future.

For example, the dental line is supposed to go public as early as Q3 2019. This segment hasn't been as successful as the others in recent years. However, they see great potential in Asia. As a dental technology company, Danaher not only produces dentures, implants and braces, but also dental chairs, drills and even X-ray machines. Either the division will be sold off completely and Danaher will have more cash for further acquisitions, or the separation will happen as a spin-off. That would mean shareholders get the shares of the new DentalCo. booked into their portfolio for free. Then everyone has to decide for themselves whether to keep the shares or not.

On top of that, Danaher has another big acquisition coming up soon. It reached an agreement with General Electric and is taking over its biopharma business for a whopping 21.4 billion US dollars. The new division is a perfect fit for Danaher, and once it's been injected with the DNA of the Kaizen pro, there's bound to be enormous growth. No wonder the stock has been doing even better since the announcement than it already was ...

Do dividend investors get their money's worth here too?

If you look at Danaher's share price, you'll notice that the stock is doing phenomenally. But the board doesn't seem too keen on the dividend?! Shareholders have been receiving a payout since 1993, but unfortunately it has been cut quite a few times in recent years. And that despite there always being more than enough money in the coffers. I can't explain why that is, and I didn't find any information on it during my research either. Currently, the dividend yield is around 0.5% - at least a bit more than a savings account! And the payout ratio is still very low at 16%.

Conclusion:
Danaher has perfected the continuous improvement process and, thanks to it, has achieved unprecedented growth on the stock market. I expect this to continue for many more years - after all, there's nothing to suggest otherwise. Only the dividend policy doesn't make sense to me, but with a share price like this, maybe you can overlook that as a shareholder.