When constructing a stock portfolio oriented toward dividend growth, it is advisable to filter out all but the most proven companies as investments. One of the ways this can be done is to invest mostly in businesses with decades of dividend growth already to their credit.
Just four years away from becoming a Dividend King, the medical device maker Medtronic (MDT -0.20%) is one such company that fits squarely within this criteria. But is the stock still a buy for investors seeking steady dividend payments? Let's dive into Medtronic's fundamentals and valuation to decide.
The business is regaining its footing
Employing 95,000 people throughout 150 countries, Medtronic is a globally recognized name within the medical devices industry. The company holds roughly 50,000 patents for its medical devices, which help treat dozens of conditions ranging from heart arrythmia to diabetes. This is what supports the $107 billion market capitalization, which makes Medtronic the largest pure-play medical devices company on the planet.
| Metric | Q1 2023 | Q1 2024 |
|---|---|---|
| Organic revenue growth rate (YOY) | (4%) | 6% |
| Net margin | 20.4% | 20.7% |
Data source: Medtronic. YOY = year over year.
The Irish medical devices company recorded $7.7 billion in net sales during the fiscal first quarter (concluded July 28), which was up 4.5% over the year-ago period. This was due to the rebound in elective procedures throughout Medtronic's various markets coming out of the COVID-19 pandemic. Along with the launch of its MiniMed 780G continuous glucose monitoring system in the U.S., that's what led to solid top-line growth for the quarter.
Medtronic's non-GAAP (adjusted) diluted earnings per share (EPS) surged 6.2% higher year over year to $1.20 in the fiscal first quarter. And adjusting for an $0.08 impact to adjusted diluted EPS stemming from unfavorable foreign currency translation, currency-neutral adjusted diluted EPS would have climbed by 13.3% during the period. Growth in Medtronic's total operating expenses came in below its net sales growth rate, which is what allowed non-GAAP net margin to expand for the quarter. That is how the company's adjusted diluted EPS growth exceeded net sales growth in the quarter.
As Medtronic continues to invest billions of dollars each year in research and development and product launches, the underlying business should do fine. That's why analysts think that its adjusted diluted EPS will grow by 3.5% annually over the next five years. And given Medtronic's ability to often outperform analyst estimates, this could be an overly cautious growth outlook.
Image source: Getty Images.
Medtronic pays a well-covered dividend to shareholders
Medtronic's growth profile isn't exactly blazing fast. But the 3.4% dividend yield makes up for this fact -- it's double the S&P 500 index's 1.6% yield.
Medtronic's dividend payout ratio is poised to register at around 54% for the fiscal year concluding in April. Since this leaves the company with enough capital for growth opportunities, debt repayment, and share repurchases, the payout looks like it can grow by a mid-single-digit rate annually for the foreseeable future.
An excellent company priced at a discounted valuation
Medtronic has only partially participated in the 2023 market rally, gaining 4% year to date. This lack of a meaningful bump in the stock has kept its forward price-to-earnings (P/E) ratio at just 14.8, which is less than the medical devices industry peer average of 23.6. That may explain why analysts have an average 12-month share price target of $93, which is equivalent to 15% capital appreciation from the current $81 share price. Thus, shares of Medtronic look like something to consider for investors searching for passive income.
