A Health Check-Up On The Medtronic Dividend
Health care and health insurance costs keep increasing. I only know two ways to fight those rising costs.
- Lead a safe & healthy lifestyle
- Invest in the health care sector
Let’s focus on the second option. While we take a look at one of several health care sector stocks held in the Dividends Deluxe model portfolio.
So please join me for a Medtronic dividend and stock analysis. Just like when you go to the doctor, we will be sure to see if the Medtronic dividend is healthy.
Medtronic Company Background
Medtronic is a global healthcare solutions company.
They are committed to improving people’s lives. And do so through medical technologies, services, and solutions.
As a result, they produce and sell products in these health care areas:
- Cardiac and vascular
- Minimally invasive therapies
- Restorative therapies
- Diabetes services and solutions
Company Facts & Statistics
Medtronic operates out of over 350 locations in more than 150 countries. And they execute their mission through 86,000+ employees.
Source: About Medtronic
Finally, Medtronic stock trades on the New York Stock Exchange (NYSE) under the ticker symbol MDT.
Related: Abbott Labs Stock Dividend Analysis
Medtronic Dividend Yield
Medtronic pays an annual forward dividend of $2.16 per share. This is a 2.0% Medtronic dividend yield at the recent Medtronic stock price.
Regular readers know I prefer dividend yields in the 3%-5% range.
Medtronic’s dividend yield falls well below this range. But I will accept a lower dividend yield in return for higher dividend growth.
Let’s check the Medtronic dividend growth next.
Medtronic Dividend Growth Rate
|1 Year||3 Years||5 Years||7 Years|
As shown in the chart above, the Medtronic dividend growth has been quite good. At least from my perspective. I can accept Medtronic’s lower dividend yield with consistently high dividend growth like this.
In addition, Medtronic recently increased its dividend by another 8.0%. With the latest dividend increase, Medtronic has increased its annual dividend for 42 consecutive years.
As part of their dividend increase announcement, this is what company management had to say:
“Including today’s increase, Medtronic’s dividend per share has grown by 77 percent over the past 5 years and has grown at a 17 percent compound annual growth rate over the past 42 years.“
Source: Medtronic press release
Medtronic Is A Dividend Aristocrat
42 years of dividend growth classifies Medtronic stock as a Dividend Aristocrat. Dividend Aristocrats are those rare and special companies who have increased their dividends annually for at least 25 consecutive years.
As I said, this is an excellent track record of dividend growth. And a nice long history of it.
Projected Medtronic Dividend Growth
I expect a more modest level of dividend growth in the future. For my planning purposes, I’m going to assume a 7%-8% annual growth rate in future years.
Medtronic Revenue Trend
Medtronic’s revenue growth comes from both new products and acquisitions of other businesses. Most noteworthy, revenue jumped significantly in 2016 due to the acquisition of Covidien.
Since the Covidien acquisition, Medtronic’s revenue growth has been relatively low. Amounting to about 2% per year through the fiscal year 2020 projection.
Revenue By Product Category
Revenue breaks out across their major product categories as follows:
Medtronic Dividend, Earnings & Dividend Payout Ratio
Note that the fiscal year 2018 earnings have been normalized for one-time charges related to the 2017 tax cut and jobs act.
Based on earnings, the dividend payout ratio runs near 60%. 60% or less is a safe level for most companies that operate in industries with steady demand, like Medtronic
Furthermore, 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.
It is important to note that dividend growth has come partly due to a rising Medtronic dividend payout ratio. That’s a good reason to keep expectations tempered for future dividend growth.
I expect the dividend to grow at approximately the same rate as earnings. This will keep the dividend payout ratio from rising further.
Medtronic Dividend & Free Cash Flows
Medtronic produces plenty of free cash flow to support current and future dividend payments. For 2019, the Medtronic dividend consumed only 46% of free cash flow.
This is a very comfortable ratio. And lends further support to Medtronic dividend safety.
As part of this year’s dividend increase announcement, this is what management had to say about free cash flow and its relationship to the Medtronic dividend:
“The company remains committed to returning a minimum of 50 percent of its free cash flow to shareholders through dividends and share repurchases. Medtronic expects to grow its dividend in line with earnings…”
Source: Medtronic press release
I really like it when a company sends clear signals to investors about its intentions as they relate to the dividend. And Medtronic has an excellent track record that supports their future objectives.
Over the last several years, Medtronic has been directing most of its remaining free cash flow to reduce debt and virtually none to share repurchases.
Debt reduction is a positive sign. Since Medtronic increased its debt load significantly in 2015 to finance the acquisition of Covidien.
Medtronic Financial Position
Speaking of debt, let’s check out the health of Medtronic’s financial position. We will look at their credit ratings. And their financial leverage according to the company’s balance sheet.
Medtronic Credit Ratings
Moody’s rates Medtronic “A3”. S&P weighs in with an “A” rating.
Source: FINRA Bond Center
As shown in the chart above, both Moody’s and S&P rate Medtronic: “Investment Grade – Low Credit Risk”. The credit ratings are solid and a good sign of financial health.
Most dependable dividend-paying companies carry investment-grade credit ratings. And Medtronic is no exception.
Medtronic Balance Sheet Leverage
Medtronic’s debt to equity ratio checks in at .51. This is a very manageable level.
As a comparison, overall debt to equity for S&P 500 companies is .86. Therefore, Medtronic uses less leverage than the average S&P 500 company.
Source: Yardeni Research
Medtronic Stock Valuation
We have been discussing so many positive attributes of Medtronic stock and the Medtronic dividend. Here are a few positives that quickly come to mind:
- High dividend growth
- Solid dividend safety
- Strong financial position
- Consistent record of share price appreciation
So what’s the catch? Well, stocks that have these characteristics usually trade at a high valuation. Let’s look at value now.
Medtronic Dividend Discount Model
The single-stage dividend discount model considers several factors I have discussed thus far.
- The current annual dividend payment – $2.16 per share
- Projected annual dividend growth – $7.5%
- My desired annual return on investment – 10%
Using these assumptions, the dividend discount model calculates the fair value of Medtronic stock at $93 per share.
Medtronic Stock Price To Earnings Ratio
Medtronic’s stock trades near its 52 week high. And, earnings growth has slowed. These factors have resulted in a higher price to earnings ratio: nearly 30 times projected fiscal year 2020 earnings.
For comparison, the S&P 500 trades at only 18 times forward earnings. Therefore, Medtronic trades at a significant premium to the overall market.
But, a high price to earnings ratio is not uncommon for a quality dividend growth stock. Generally speaking, a lower price to earnings ratio represents a better value for the investor.
For my purposes, I’d like to see the price to earnings ratio come down to at least 25 times. That would also give me a Medtronic stock price buy target of $93 per share.
Morningstar Fair Value
The investment analysis firm Morningstar is a little more optimistic. They place a fair value on Medtronic stock at $110 per share.
Medtronic Stock Valuation Recap
The valuation methods suggest that Medtronic stock is fully valued to slightly overvalued at its recent price level. This is not surprising to me.
- Dividend discount model – $93 per share fair value
- PE ratio to 25 times – $93 per share buy target
- Morningstar fair value – $110 per share
Conclusions On Medtronic Stock & The Medtronic Dividend
I have a love-hate relationship with Medtronic stock.
Why Do I Love Medtronic Stock?
I have been an owner since 2010. And have enjoyed a nice return on investment. Medtronic offers just about everything I love about dividend growth stocks:
- Current income
- Income growth from dividend increases
- Solid share price appreciation
- High level of dividend safety
Why Do I Hate Medtronic Stock?
Well, hate is probably too strong of a word.
But what gives me reasons to pause about Medtronic stock and the Medtronic dividend is:
- It usually carries a high valuation
- And a low dividend yield
But, solid dividend growth and consistent share price appreciation have been enough for me to overlook those shortcomings. In fact, I really like Medtronic, the Medtronic dividend and Medtronic stock.
My Path Forward With Medtronic Stock
I plan to hold my current position for the long term. While looking to make add on purchases if the price dips to $95 per share or less.
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