Dividend Aristocrats

Medtronic Stock, a 42 Year Dividend Aristocrat

Medtronic Stock is a member of the S&P 500 Dividend Aristocrats index, an elite group of blue chip stocks that have raised dividends for at least 25 consecutive years.

Stocks that get on the dividend aristocrats list tend to retain their rankings for many more years due to the nature of their business models and ability to generate strong free cash flows and earnings. Medtronic has grown its dividend for 42 years in a row, which is an impressive run.

Management last raised its dividend from 50 cents a share in March 2019 to 54 cents per share in June 2019, a healthy 8% growth year over year. You might be wondering what makes Medtronic or other dividend aristocrats so special?

It is the ability to weather multiple economic boom and bust cycles, sell great products and services that consumers love, employ strong management that is good at allocating capital and generating free cash flows. The business should also have competitive advantages that makes it difficult for competitors to duplicate the moat.

In this article, we review Medtronic’s business operations, explain latest financial results, study dividend growth history, stock’s valuation and long term performance to peers in the S&P 500 Health Care sector, and inform of upcoming dividend dates and how to fetch the Medtronic (MDT) latest stock price.

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

Founded in 1949 and headquartered in Dublin, Ireland, Medtronic is a large medical technologies and solutions company that operates in 150 countries worldwide.

The company’s mission statement is to alleviate pain, restore health and extend lives for millions of people. Its Primary customers include hospitals, clinics, pharmacies, distributors and government healthcare programs. Medtronic conducts operations in 4 business segments. They are:

  1. Cardiac and Vascular Group
  2. Minimally Invasive Therapies Group
  3. Restorative Therapies Group
  4. Diabetes

When analyzing companies with a strong competitive moat, Medtronic stands out as it owns 47,000 medical patents in its portfolio, employs 11,200+ scientists, engineers and medical professionals and spent $2.3 billion in research and development in 2019.

The largest revenue generating segment is Cardiac and Vascular Group generating $11.5 billion in 2019 revenues, followed by Minimally Invasive Therapies at $8.5 billion, Restorative Therapies at $8.2 billion and Diabetes group at $2.4 billion.

Screenshot attached shows the company’s mission to be a continuous innovator developing medical technologies and solutions that make people healthier and live longer.

The picture also showcases some of the company’s top selling products, newest innovations and disruptive technologies such as robotic assisted surgery platform, deep brain stimulator, portable hemodialysis, etc.

Source: 2020 Medtronic JP Morgan Conference

Revenue Analysis and Share Buybacks

For full year 2019, Medtronic generated $30.557 billion in total revenues and earned a net income of $4.631 billion, implying a net profit margin of 15%. Revenues grew 2% year over year from 2018’s $29.95 billion.

Over the last decade, Medtronic has grown its revenues from $15.39 billion in 2010 to $30.557 billion in 2019. This represents a healthy 7% compounded annual growth rate (CAGR).

There are not too many companies that have grown their top line revenues at a compounded rate of 7% annualized over the last 10 years. Medtronic happens to be one of the fewer special companies that have achieved this feat.

Trading on the New York Stock Exchange, MDT sports a $125.8 billion market capitalization and pays a 2.3% dividend yield. This yield is quite decent, and beats the yield on the S&P 500 by 30 basis points.

Management has grown dividend payments at 12.1 % compounded annual growth rate (CAGR) over the last 5 years, which is a very strong performance.

2019 was a remarkably strong year for Medtronic as the company experienced 5.5% organic growth in revenues despite of headwinds such as China tariffs, supply constraints due to factory closures, etc.

The Diabetes group grew 13.4,%, Restorative Therapies grew 6.6% and Minimally Invasive group grew 5.8%. Medtronic also generated a record $5.9 billion in free cash flows, a significant improvement over 2018’s free cash flow of $3.6 billion.

Table below shows the company’s revenue growth from $20.26 billion in 2015 to the present $30.557 billion in 2019. This growth was made possible by a merger with Covidien with a $42.9 billion price tag.

Covidien is a manufacturer of medical devices such as surgical, respiratory, lung health, renal care and gastrointestinal products. The monster size of the transaction moved Medtronic to #2 placement in medical technologies companies just behind Johnson and Johnson, and even surpassing the likes of General Electric and Siemens.

The combined company now has a dozen $1 billion franchises and combining operations of the 2 firms enabled $850 million in cost savings through synergies in 2018. Total costs savings in 2014 and 2015 realized was closer to $2.1 billion.

Management has rewarded shareholders with significant share repurchase programs including $5 billion of share repurchases authorized in June 2017 followed by another $6 billion in March 2019.

However, thanks to large long term debt obligations of $24.48 billion, this stock has under performed the S&P 500 as shown in the comparison chart below.

Over the last 5 years, the S&P 500 has grown to $175 from $100 base while Medtronic Stock has grown to only $167. It has also vastly under performed the S&P 500 Health Care Equipment Index which has risen to $231.

Source: 2019 Medtronic Annual Report

Growth Outlook

For Q3, 2020 earnings results released February 18th, 2020, Medtronic reported revenues of $7.72 billion, a 2.9% growth year over year from Q3, 2019’s revenues of $7.546 billion. Gross margins came in at 68.9% while operating margin came in at 21.2%. Diluted earnings per share grew 11.6%, from $1.29 per share in Q3, 2019 to $1.44 per share in Q3, 2020.

Growth was seen across all segments including Cardiovascular group reporting 1.8% growth thanks to TAVR minimally invasive surgical products, Restorative Therapies group reporting 3.6% growth thanks to Spine and Trauma surgical products, strong international growth of 16% in Diabetes group and strong performance out of emerging markets including China, Southeast Asia and Europe.

For full year 2020, management expects organic growth of 4.5% and revenues coming in between $8.4 billion to $8.5 billion. Earnings per share is expected between $1.62 to $1.64 per share growing 7.1% to 8.4% year over year.

Management intends to accelerate revenue growth through to 2021 thanks to major product launches including TAVR minimally invasive surgical products, Spine Robotic systems, Micra Transcatheter Pacing systems, among others.

Attached screenshot displays full list of product launches expected next year as well leadership position in fast growth markets including Neurovascular for Stroke, Pain Therapies, Neurosurgery imaging, etc.

Dividend Growth History

Medtronic is a member of the prestigious S&P 500 Dividend Aristocrats index, having raised dividends for 42 consecutive years.

According to the company’s Investor Relations website, management has grown dividends from 1.2 cents a share in 1985 to $2.12 per share in 2019. This represents a stunning 16.5% compounded annual growth rate (CAGR) over 34 years.

Chart below shows the steady uptrend in Medtronic’s dividend growth history from 1985 to 2003, after which the power of compounding took charge and resulted in an even steeper uptrend in the company’s dividend growth.

Chart below also shows the year over year percentage growth in Medtronic’s dividend. Readers can note a majority of the years from 1985 to 2000s, the company grew its dividend at 20% or more a clip each year.

However, during the technology bubble of 2000s, this growth slowed to 10%. During the great financial crisis of 2008 to 2011, the dividend growth slowed to mid single digits to about 5%. Since then, the dividend growth has been at mid to high single digits.

Measuring the Dividend Payout Ratio

Lets calculate the dividend payout ratio for Medtronic. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In 2019, Medtronic generated $7 billion in cash flows from operations and spent $1.134 billion in capital expenditures. What is the free cash flow?

Free Cash Flow = Cash from Operations – Capital Expenditures

Free Cash Flow = $7 billion – $1.134 billion

FCF = $5.866 billion

For fiscal 2019, Medtronic paid out $2.69 billion in dividends. So what is the dividend payout ratio?

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

Dividend Payout Ratio = $2.69 billion / $7 billion

DPR = 38%

A dividend payout ratio of 38% is very strong leaving cash for future dividend increases, making smart and accretive acquisitions, share repurchases and increasing sales staff to grow revenues. It also leaves plenty of room for innovation, disruption and spending on research and development to perform better than competitors.

Long Term Performance

Medtronic Stock has grown in price from $2.5 in January 1990 to $94 as of May 2020. This represents a compounded annual growth rate (CAGR) of almost 13% over a period of 30 years. This is a stunning performance over a long period of time.

Readers should note that due to Covid-19 Pandemic, Medtronic’s stock has dropped from a high of $120 in January 2020 to $94 as of May 2020. If we take the pre-pandemic price of $120, the long term compounded annual growth rate sweetens to 13.8% over 30 years.

Attached chart displays Medtronic Stock’s long term performance. During the great financial crisis of 2008, the stock dropped from a peak of $58 in June 2006 to trough of $29 in March 2009.

This loss resulted in 50% of the stock’s value being wiped out, lower than the S&P 500’s drop of 56%.

Stock Valuation

Bloomberg Analysts’ Consensus expects Medtronic to earn $4.97 in earnings per share for 2020. Using the current stock price of $94 and dividing in to the expected earnings, we arrive at a forward price to earnings ratio of 18.9 times.

As a comparison, the S&P 500 currently trades at a forward PE of 20.4 times earnings.

Medtronic is indexed in the S&P 500 Health Care Sector (XLV) which means it is considered somewhat a “safety stock” as people will get sick and need medical products, surgeries, etc.

While Medtronic trades at 18.9 times forward earnings, the S&P 500 Health Care Sector trades at 14.4 PE, making the stock more expensive than its peers.

Executive Summary

Here is what we like and don’t like about Medtronic Stock.

Likes

  • 42 years of growing dividends making this a dividend aristocrat stock.
  • Dividend payout ratio of just 38%. This leaves lots of cash flow for making smart acquisitions that add to bottom line, increase dividends and repurchase shares.
  • Revenue growth of 7% CAGR over 10 years due to skillful management making profitable acquisitions and adding to the company’s strong list of medical products.
  • A decent dividend yield of 2.3%.
  • Strong competitive moat with a huge team of scientists and engineers (11,200+) with 47,000 patents in the company’s portfolio spending $2.3 billion in research and development in 2019. This is surely going to keep chipping away at competitors and continue the success story.

Dislikes

  • Medtronic has long term debt obligations of $24.48 billion which is a massive number. Management cites this as a risk that could adversely affects its business operations and continuity.
  • MDT Stock has under performed its peers in the S&P 500 Health Care Equipment Index, and has also not managed to beat the S&P 500 over a long period of time. We dislike this, however, this problem can be fixed if management commits to paying off debt over the next 5 years.
Market Capitalization $125.8 Billion
Dividend Yield 2.3%
Forward PE Ratio 18.9 times 2020 earnings
Dividend Growth (5 Year Avg.) 12.1%
Dividend Payout Ratio 38%
EPS Growth (5 Year Avg.) 2.5%
2019 Revenues $30.557 Billion
Gross Margin 68.9%
Net Margin 15%

Medtronic Ex Dividend Dates

Declared Ex-Date Record Payable Amount Type
0.54 U.S. Currency
Total dividends in 2020: 0.54
0.54 U.S. Currency
0.54 U.S. Currency
0.54 U.S. Currency
0.50 U.S. Currency
Total dividends in 2019: 2.12
0.50 U.S. Currency
0.50 U.S. Currency
0.50 U.S. Currency
0.46 U.S. Currency
Total dividends in 2018: 1.96
0.46 U.S. Currency
0.46 U.S. Currency
0.46 U.S. Currency
0.43 U.S. Currency

Source: Medtronic Investor Relations | Dividend History

Medtronic Stock Price

To view the most recent price for Medtronic (MDT) Stock, visit the company’s Investor Relations website and hit “Stock Performance.”

What's your reaction?

Excited
0
Happy
0
In Love
0
Not Sure
0
Silly
0

You may also like

Comments are closed.