Monday, June 27, 2016

Medtronic: High Dividend Growth Stock

Medtronic plc manufactures and sells device-based medical therapies worldwide.
Over the past week, dividend champion Medtronic raised its quarterly dividend by 13.10% to 43 cents/share.

This increase marked the 39th consecutive year of an increase in the dividend payment for Medtronic. Medtronic`s dividend per share has nearly quadrupled over the past decade and has grown at an 18 percent compounded annual growth rate over the past 39 years. The company has managed to boost dividends by 14.30%/year over the past decade.

Omar Ishrak, Medtronic chairman and chief executive officer had this to say about the most recent dividend increase:

"Today`s double-digit increase in our dividend reflects the confidence the board and our management team has in Medtronic`s ability to deliver consistent and sustainable growth, as well as to generate significant and increasingly accessible free cash flow. We are deploying considerable amounts of capital strategically, consistently, and with discipline to provide attractive returns for our shareholders. This includes our focus on delivering dependable, long-term growth in our dividend."

This is what successful dividend growth investing is all about. You have a company that has a winning formula, which allows it to generate higher earnings over time. This winning formula is what others refer to as a moat, or a competitive advantage. This moat could be strong history of innovation, a dominant market position, a unique product or service, regulated monopoly, substantial switching cost, or a network effect. The company generates so much in extra cash, that it has decided to share this growing pile with shareholders. This is how quality companies manage to build a track record of 39 consecutive dividend increases in a row. Only companies that have some unique competitive advantages in their field manage to achieve such a track record. In Medtronic's case,  the company is a leader in many fields in the competitive world of medical devices. Despite showering shareholders with more cash every single year for almost four decades in a row, the company is still able to grow. Smart management teams achieve that only by investing in projects that provide high returns on investment. The dividend provides management with a way to focus their limited resources only on the most profitable projects, in order to grow the business. This disciplined approach to growing the business ends up generating growth in earnings per share and torrents of free cash flow to share with stockholders.

As we have discussed before, there is value to dividend growth. Let’s say that you owed 100 shares of the company. The value of the shares as of Friday would have been $8,326. You would have expected to generate $152 in annual dividend income. At the new dividend rate, the amount of annual dividend income increases by $20 to $172/year. If Medtronic had not raised the dividend, you would have had to buy 13 additional shares at a cost of $1,082 in order to bump up that amount of dividend income to $172. In other words, companies like Medtronic that regularly grow dividends, provide a lot of value to their long-term investors, because they can provide more in dividend income down the road with less money invested.

Medtronic is expected to earn $4.66 per share in 2017 and $5.16 per share in 2017.

The company closed the acquisition of Coviden in 2015. This move helped the company to move its base to Ireland. The top tax rate in Ireland at 12.50% is lower than the top US corporate marginal tax rate of 35%. This acquisition is expected to generate significant synergies for Medtronic, expand its global reach, diversify its product lines. Emerging markets could present solid opportunities for growth, as emerging markets in general could deliver double digit percentage increases in sales over the next decade.

The growth in earnings per share will be achieved by introductions of new devices, cost containment initiatives as well as increase in foreign sales. Some cost containment initiatives that Medtronic had started a few years ago are starting to bear fruit. Future growth in earnings per share could also be aided through share buybacks.

The medical equipment market is highly competitive and is characterized by short product life cycles. However, the scale of Medtronic’s operations, its continued investments in innovation as well as its diverse nature of procedures offset some of the risks. One risk that the company faces includes regulatory risk.

The company has consistently repurchased stock over the past decade, and has reduced its share count from 1,217 million shares in 2006 to 1,014 million in 2014. As a result of the acquisition of Covidien, the number of shares have increased to $1.423 billion. Based on the company’s proclivity to share its excess free cash flow with shareholders in the form of dividends and share buybacks, I wouldn’t be surprised if the company ends up with roughly a billion shares outstanding a decade from now.

Based on expected earnings for FY 2017, and new dividend payment, I calculate a dividend payout ratio of 36.90% for Medtronic. Medtronic has stated that it is committed to returning a minimum of 50 percent of its free cash flow to its shareholders through dividends and share repurchases. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, Medtronic is attractively valued at 17.90 times earnings, has an adequately covered dividend and yields 2.10%.

Full Disclosure: Long MDT

Relevant Articles:

Key Ingredients for Successful Dividend Investing
How to become a successful dividend investor
The most important metric for dividend investing
Margin of Safety in Dividends
My Entry Criteria for Dividend Stocks


  1. Thank you very much for the information. This definitely seems like a good investment. However, looking at the technicals, I think this stock needs to pullback further, and also the technicals of the S&P500 are screaming "crisis" and probably could go down. Nevertheless, I have just put this stock on my watchlist.

    Thank you very much again!

    1. I do not let short term technicals influence the decision to buy a company that i will hold for the next 10-30 years

  2. I was a Medtronic employee for over 25 years and have owned MDT stock for more than that. It has provided me with a nice pension as well as good growth (including dividends) over the years.

    1. It must have been nice getting a discount on employee stock. Just make sure to not have too much exposure in one stock

  3. I've held MDT for nearly 5 years and was DRIP'ing the div's prior to the inversion. Unfortunately, since then Schwab doesn't have an agreement to automatically reinvest which is an annoyance.

    So I use SCHD as a substitute since it trades free for me.

    1. Interesting. I was under the impression that brokers can reinvest your shares easily - sharebuilder does it and fidelity does it too

      I don't DRIP - i pool dividends and new contributions to buy shares at attractive prices

  4. Thanks for the blog! It's a great resource. What are your thoughts on investing in stocks that have similar yields to the S&P500? It would seem that a ~2.0 return from a diversified set of 500 stocks vs. one stock would give you similar dividend return without the eggs-in-one-basket risk associated with owning one stock. Is it that the dividend growth potential is higher compared to the S&P500?

    1. I have talked about building diversified dividend portfolios with companies like for 8 years. I have never said to own just one stock.

      Medtronic has raised dividends for 39 years in a row. S&P 500 has not - and it includes a lot of companies which do not even pay dividends.

  5. Is there foreign tax withholding on dividends now that MDT is Irish?

  6. Thank you for sharing. Medical-Tech Companies like (Medtronic, Stryker, ...) are looking more and more appealing to me.

  7. Healthcare is the way to go and their inversion will certainly help the bottom line. While they have a high P/E ratio right now you have to pay for quality. In the long run this will be irrelevant. While I do not currently own it, I have it on my watchlist with others in or around this industry.

    1. A forward P/E of 18 is not that high today, relative to other opportunities

  8. For anyone reading this now... be careful as MDT's price has shot up in the last few days by over $8/share. That means the yield is less than 2% now. To have the 2.1% yield quoted in this article, you'd be waiting for a drop to $79.52 at the current expected calendar 2016 dividend total ($1.67)


Questions or comments? You can reach out to me at my website address name at gmail dot com.

Popular Posts