Let’s Put the Medtronic Dividend on the Operating Table

Medtronic Dividend Stock Analysis

Health care and health insurance costs keep increasing.  I only know two ways to fight those rising costs.

1. Lead a safe & healthy lifestyle
2. Invest in the health care sector

Let’s focus on the second option.  While we take a look at a health care sector stock.  So please join me for a dividend deep dive of Medtronic.  Most noteworthy, let’s analyze the Medtronic dividend to see if it’s healthy.

COMPANY BACKGROUND

Medtronic is a global healthcare solutions company.  They are committed to improving people’s lives.  And do this through medical technologies, services, and solutions.

As a result, they produce and sell products in these areas:

• Cardiac and vascular
• Minimally invasive therapies
• Restorative therapies
• Diabetes services and solutions

MEDTRONIC DIVIDEND YIELD

Medtronic pays an annual forward dividend of $2.00 per share.  This is a 2.1% Medtronic dividend yield at the recent price of $96 per share.

COMPOUND ANNUAL DIVIDEND GROWTH RATE

1 Year	3 Years	5 Years	7 Years
8.4%	14.8%	12.1%	11.2%

Medtronic recently increased its dividend another 8.7%  And Medtronic has increased its dividend 40 consecutive years.  This is some big-time dividend growth.  And a nice long history of it.

REVENUE

Medtronic has strong revenue growth.  Furthermore, growth comes from new products and acquisitions of other businesses.  Most noteworthy, revenue jumped in 2016 due to the acquisition of Covidien.   

Revenues are balanced across the operating groups as follows:

• Cardiac and vascular – 35% of revenues
• Minimally invasive therapies (formerly Covidien) – 33% of revenues
• Restorative therapies – 25% of revenues
• Diabetes services and solutions – 6% of revenues.

MEDTRONIC DIVIDEND, EARNINGS AND PAYOUT RATIO

First of all, note that 2018 earnings have been adjusted for charges related to the 2017 tax cut and jobs act.

Based on both earnings and free cash flow, the dividend payout ratio runs near 50%.  A lower payout ratio is a positive indicator.  It shows the company has room to raise the dividend in the coming years.  Or, withstand an earnings drop without having to reduce it.  50% or less is a safe level for most companies.

In future years, I expect the dividend to grow at the same rate as earnings.  I estimate about 8% per year.

VALUATION & CONCLUSION

Medtronic’s stock trades near its 52 week high.  However, earnings growth has brought the price to earnings ratio down to the mid-’20s.  That is still pretty high.  A lower price to earnings ratio typically represents a better value for the investor.

SUMMARY & WRAP UP

I have a love-hate relationship with Medtronic.

Why do I love it?  I have been an owner since 2010.  And have enjoyed a nice return on investment.  Medtronic has what I love about dividend growth investing:

• Current income
• Income growth from dividend increases
• Solid share price appreciation

Why do I hate it?  Medtronic usually has a high price to earnings ratio.  And a low dividend yield.  Because of the low dividend yield, it is not a typical favorite of the dividend blogging community.

I plan to hold my current position for the long term.  While looking to add on any significant price weakness from current levels.

OTHER RELATED ARTICLES

I hope you enjoyed this article.  If so, here are a couple of others that you may find interesting:

Another dividend stock analysis in the health care sector:  Abbvie

The model portfolio where Medtronic resides:  The Dividend Deluxe

WHAT ARE YOUR COMMENTS?

Do you own or intend to purchase shares of Medtronic?  What do you think of the company’s prospects?  Leave a comment and let us all know!

 

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