TipRanks Smart Dividend Newsletter – Edition #37

Hello and welcome to the 37th edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.


Investment Thesis: Solid Devices

The global healthcare sector is full of investment opportunities ranging from start-ups working on cutting-edge innovations with huge potentials for growth to major conglomerates that offer stability but limited growth prospects.

There is also a middle ground: large and profitable companies, which combine stability with prospects for growth. These winners can be found across all industries of the sector, with one of the pinnacles of profitable innovation being the Medical Technology industry.

The true value in this industry lies in companies that balance innovative prowess with financial health – those that can deliver consistent dividends, have a solid track record of growth, and are well-positioned for the future. The resilience of such companies is often underscored by their diversified product lines and international market presence, which help mitigate the inherent risks of their industry.

Let us present one such company, which we view as a compelling income investment idea.



This Week’s Quality Income Stock Idea

Medtronic Plc (MDT) is a global leader in medical technology that manufactures, distributes, and sells medical devices and services to healthcare systems, physicians, clinicians, and patients worldwide.

The company was founded in 1949 in Minneapolis as a business focused on medical electronics. The company saw its first significant success in 1957 when it invented the world’s first battery-operated heart pacemaker.

Several decades and many life-saving inventions later, Medtronic is one of the largest medical device companies in the world. It has a market cap of $116.5 billion and annual revenues of $32 billion. Its ~95,000 employees across 150 countries serve over 74 million customers, while treating more than 70 health conditions.

MDT heavily invests in R&D, incorporating cutting-edge technologies to engineer solutions for challenging patient conditions. The company has a strategic collaboration with NVIDIA to accelerate AI innovation for healthcare.

Medtronic began publicly trading on the New York Stock Exchange (NYSE) in 1977 under the ticker “MDT”. In 1985, it was listed among the Fortune 500 as one of the largest publicly held companies in the U.S., a position it has retained ever since.

MDT has a decisive capital allocation strategy, which prioritizes innovation-driven growth investments while delivering consistent dividends to shareholders, as well as performing opportunistic buybacks. Within this strategy, in FY2023 (ended April 28) the company invested $2.7 billion in R&D and paid $3.6 billion in dividends. In 2023, MDT repurchased its shares for the amount of $645 million.

Medtronic is a Dividend Aristocrat, i.e., a member of the list of companies that have increased their dividends for at least 25 years. In MDT’s case, its dividend history stretches back to 1978, spanning 46 years of consistent dividend payments and annual increases in its cash payouts. MDT’s dividend-per-share (DPS) has risen at a 16% compounded annual growth rate over this time span.

The company remains committed to returning a minimum of 50% of its free cash flow to shareholders, primarily through dividends, and to a lesser extent, share repurchases. Based on this commitment and MDT’s dividend track record, analysts expect the company to continue raising its cash payouts for years to come.

Currently, Medtronic’s dividend yield stands at 3.12%, much higher than the Healthcare sector’s average of 1.5%, and higher than its industry and its peer average.

The company’s dividend payout ratio is at a medium level at 52%, but it is well-covered by earnings. The cash payout ratio of 86% underscores its priority of returning capital to shareholders.

Medtronic’s future dividend growth outlook is supported by its robust financial health, with a medium-low net debt-to-equity ratio (33%) and more-than-sufficient debt and interest-payments coverage. The company’s healthy fundamentals are reflected in its high credit ratings, “A” at S&P Ratings and “A3” at Moody’s (a third notch within the top credit rating level reflecting a “strong financial position”).

The company’s dividend reliability is supported by its ability to maintain overall revenue and earnings stability, despite the cyclical nature of its industry. In the past five years, MDT’s EPS (earnings-per-share) rose at a CAGR of 14.1%.

Analysts expect the earnings growth to slow to a CAGR of ~5% over the next five years. While it is an acceptable rate of growth for a healthcare giant, MDT may continue to surprise on the upside: out of the 12 latest quarters, Medtronic’s EPS results surpassed analysts’ estimates in 11 reporting periods. In the latest reported period, FQ2 2024 (ended October 2023), the company beat the estimates again and raised its full-year fiscal 2024 revenue and EPS guidance.

Medtronic wields a wide economic moat and has an outstanding product and geographical diversification, with foreign sales across all continents accounting for roughly 50% of the company’s total revenues. In addition, MDT boasts a very strong competitive position: it holds over 50% of the global market for heart devices, which are its core product line. It is also the market leader in spinal products, insulin pumps, and neuromodulators for chronic pain.

Importantly, only about 20% of MDT’s total revenues come from volatile, but higher-growth innovative products, so that the company has sufficient room to increase exposure to high-growth offers without compromising revenue stability. Thus, it is now entering the robotic-assisted surgery (RAS) market, with its “Hugo” system having received FDA approval. The RAS market is slated to grow at a fast clip, while it currently has a very low penetration rate. Establishing a presence in RAS can be a significant growth driver for Medtronic.

The company’s stock reached a record back in 2021, but since then it has been under pressure along with the entire Medical Devices industry, as represented by iShares U.S. Medical Devices ETF (IHI). However, the industry’s stocks have staged a rebound since their lows in October, with MDT surging over 26% in the past three months.

Medtronic’s strong fundamentals and robust prospects are reflected in its TipRanks Smart Score rating of “Perfect 10”:

MDT has seen some additional downward pressure in the past year and a half due to the onslaught of the GLP-1 anti-obesity drugs, slated to shrink the market for diabetes and bariatric devices. However, the segment is responsible for only about 8% of Medtronic’s total revenues, representing a negligible headwind. However, the negative sentiment further depressed MDT’s valuations, adding to its attractiveness as a value play.

All in all, Medtronic is a stable, well-managed business with a long, solid track record of creating value for its shareholders. In the past 10 years, roughly 40% of its stock’s total return stems from dividends. MDT’s large size, strong finances, exceptional diversification, and wide customer base reduce business risks, ensuring stability. Therefore, we view Medtronic as well-suited to be a part of long-term income portfolios.



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