Stock Analysis: Medtronic Inc. (MDT)

Linked here is a detailed quantitative analysis of Medtronic Inc. (MDT). Below are some highlights from the above linked analysis:

Company Description: Medtronic Inc. is a global medical device manufacturer has leadership positions in the pacemaker, defibrillator, orthopedic, diabetes management and other medical markets.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

MDT is trading at a discount to 1.) and 3.) above. The stock is trading at a 16.1% discount to its calculated fair value of $38.78. MDT earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div.

MDT earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. MDT earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1977 and has increased its dividend payments for 33 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

MDT earned a Star in this section for its NPV MMA Diff. of the $1,106. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as this company. If MDT grows its dividend at 9.4% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 3.71%. MDT earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.

Memberships and Competitors: MDT is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. MDT's peer group includes: Bard C.R. (BCR) with a 0.9% yield, Baxter International (BAX) with a 2.6% yield and Becton Dickinson (BDX) with a 2.1% yield.

Conclusion: MDT earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks MDT as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $41.65 before MDT's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 33 years of consecutive dividend increases. At that price the stock would yield 2.16%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 7.0%. This dividend growth rate is well below the 9.4% used in this analysis, thus providing a margin of safety. MDT has a risk rating of 1.25 which classifies it as a low risk stock.

MDT owns a diversified portfolio with a strategy to develop products for a wide range of chronic diseases. Although it is exposed to the highly competitive areas of the medical equipment markets, MDT enjoys many competitive advantages including scale (operations and sales), product breadth and financial strength, with a free cash flow payout of 28% and debt to total capital of 39%. The company is well-positioned for future development in disease management. MDT is currently trading more than 15% below my fair value price of $38.78. This company has a lot of promise, as such, I will continue to evaluate it for a place in my portfolio. For additional information, including the stock's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in MDT (0.0% of my Income Portfolio). See a list of all my income holdings here.

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This article was written by Dividends4Life. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].

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Weekend Reading Links - September 5, 2010

For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network over the past week:

Articles From DIV-Net Members

• Dividends Value presented Stocks That Pay Monthly Dividends
  
• Dividend Growth Investor presented The New Dividend Achievers of 2010
  
• Barel Karsan presented Managing Earnings or Managing The Business
  
• Dividend Tree presented Number of Companies in an Individual’s Portfolio ?
  
• Buy Like Buffett presented Warren Wants Wesco
  
• The Dividend Guy presented High Dividend Stock Picking Ideas
• Disciplined Approach to Investing presented Alternative Investments: Navigating Volatile Markets
  
• Old School Value presented 4 Stocks on My Watch List
  
• 40percent 20years presented HQ - Bank again in the news
  
• Value Walk presented The Art of Practical Investment Decision Making
  
• Dividend Monk presented Financial Automation
  
• Wax Inc presented Spirit AeroSystems, Inc. - A Maker of Cloud Cars
  
• The Passive Income Earner presented Weekly Blog Round: Your Money & Your Dividends

There are some really good articles here, please take time and read a few of them.

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Stock Analysis: Altria

Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, wine, and other tobacco products in the United States and internationally. The current state of the company was finalized after a 2007 and 2008 spin-off of Kraft Foods (KFT) and Philip Morris International (PM). Because these divisions accounted for over two-thirds of the company’s profit before the spin offs, the dividend payment had to be prorated for the legacy US tobacco business. As a result it appeared to be lower than before, while in reality an investor in Altria in early 2007 would have not only maintained but also increased their dividend income. If the dividend record of the old Altria was continued to these days, an investor would find out that the company has raised distributions for 43 consecutive years. This tobacco stock was the best performer in the S&P 500 for the 50-year period from 1957 to 2007.

Currently the company is trading at a low P/E of 13.60, yields 6.70% and has a dividend payout ratio of approximately 80%. The current annual dividend is $1.52/share, and has been raised twice this year. The company earned $1.54/share in 2009 and is expected to earn $1.90/share in 2010 and $2/share in 2011. Altria has a target dividend payout ratio of 80% of earnings per share. This means that the company can afford to pay a dividend of $1.60 by next year, and increase of about 5%. Since 2005, earnings per share from continuing operations attributable to Altria Group have increased by 6% annually.

The economics of the tobacco business are really interesting. Most of the revenue generated from sales go to Federal and State governments, while the cost of the actual product is very small relative to its sales price. The demand is inelastic. When prices for products increase, the increase more than offsets the decrease in consumption caused by the price. This leads to increase in revenues for the cigarette manufacturer.

Supposedly even Warren Buffett liked the economics of the tobacco business in the 1980’s when he said: "I'll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty.” However the increased regulatory actions against tobacco companies have prevented him from investing in the industry since “investments in tobacco are fraught with questions that relate to societal attitudes and those of the present administration...I would not like to have a significant percentage of my net worth invested in tobacco businesses."

The company is a dominant player in the US tobacco market, with a 50% market share in 2009. This mature market is in decline however, and as a result future growth in earnings per share could be difficult to materialize. They would likely come from efficiencies related to restructuring, such as the closure of its Cabarrus facility as well as the integration of smokeless tobacco company UST, which Altria acquired in 2008. Altria expects the UST acquisition to be accretive in 2010. Altria also expects to generate an estimated $300 million in UST integration cost savings by the end of 2011. Altria also expects to achieve approximately $290 million in additional cost savings by the end of 2011 for total anticipated cost reductions of $1.5 billion versus 2006. (Source)

The issues that prevent some investors from purchasing Altria stock are potential liabilities related to possible unfavorable judgments against the company. There were 129 cases pending against the company at the end of 2009 for example. Back in the late 1990’s for example the company’s stock price was hammered on fears that lawsuits could potentially wipeout Altria. In reality it is doubtful that the company would go under, since its tax revenues are needed to fill the empty state and local coffers.

Altria Group, Inc. also held a 27.3% economic and voting interest in SABMiller plc at December 31, 2009. The stake in the company was worth $12.70 billion at year end, which was higher than the 5 billion the investment is recorded on Altria’s books.

I view Altria as a hold if held on its own. If investors also own a share of Phillip Morris International (PM) for every share of Altria (MO) that they own, I would only then view Altria as a buy. Phillip Morris International (PM) owns the international operations of Altria and was spun off in 2008 as an independent company.

Full Disclosure: Long KFT, MO and PM

Relevant Articles:

- Altria Delivers Another Smoking Hot Dividend Increase
- Altria (MO) - a recession proof high yield dividend stock
- Philip Morris International versus Altria
- 2010’s Top Dividend Plays

This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].

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Exchange Traded Funds: Strategic Use Provides Asset Allocation

Exchange Traded Funds (ETF) are another form of investing vehicle available to investors. The major attraction for ETF has been low cost expenses and fees in comparison to mutual funds and ability in trade during market hours. Like any other investing vehicles, I believe ETFs have a strategic role to play in our portfolio. The simplicity with which one can buy and sell an ETF makes it difficult to understand how it is structured and what its constituents are. ETFs are good investment vehicle for broad market exposure and access to alternative assets.

• Broad Exposure: It can be used for hedging against broad market performance, broad industry sector, broader country exposure, or any particular asset class. Investors need to understand which particular ETF is structured to meet that objective (all ETFs are not created equal). Many ETFs invest in few bunch of stocks and expect only those small number of stocks to provide broader exposure. In my viewpoint, ETFs for broad exposure should consist of more than 250 or more stocks.

• Access to Alternative Assets: This is one the significant benefits depending upon how the ETF is constructed. E.g. ETFs based funds for leverages, currencies, commodities, futures, etc are being made available. However, I believe that such ETFs are high risk prepositions. I am not advocating the use of such assets, but merely pointing the fact that such asset classes were not available earlier.

ETFs can play these two roles successfully if investors are investing for long haul and understand their structure.

• Time Horizon: The time horizon should be in the order 10 years or more. One of the methods to invest in ETF is dollar cost averaging over a period of time. There is a school of thought that investors should buy when an ETF is below intrinsic value or when relative PE is less than one. It is next to impossible or futile to go into these exercise. Keep it simple, and hence buy and/or continue to add when it is below 200 day and 365 day moving average.

• ETF Structure: Many ETFs are closed end funds with high expenses, many provide dividends that include return of capital, many provide short term gains distributions, many consist of only 30 or 40 stocks based on capitalization, etc. In addition, investors need to more careful for ETF focusing on emerging markets. Many funds just invest in ADR/GDR/ADS, which is locally available in US and still charge high fees, many only have less than 100 stocks, etc.

ETFs can strengthen investor’s portfolio and help in asset allocation. At this point in time, ETFs are the best investment vehicles to get exposure to emerging markets. I use Wisdom Tree ETF, EPI, for exposure to Indian economy. Investors do not need to worry about identifying countries or individual companies in emerging countries. It provides a means to invest in India markets, but also a mechanism to buy and sell easily during trading hours in US bourses.


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The CEO's A Liar

We've spent some time on this site discussing how investors can tell if management is behaving in a questionable manner. There are some tip-offs based on EPS rounding, as well as some clues based on management candor. But recently, two researchers pored over conference call verbiage and determined that conference call discussions can reveal whether there is a greater likelihood that management is being deceitful.

Investors are encouraged to listen to conference calls, as they contain a dearth of information that is not available in written releases. But according to Stanford researchers Larcker and Zakolyukina, they reveal much more than originally thought. They contend that deceptive CEOs:

"have more references to general knowledge, fewer non-extreme positive emotions, and fewer references to shareholders value and value creation. In addition, deceptive CEOs use significantly fewer self-references, more third person plural and impersonal pronouns, more extreme positive emotions, fewer extreme negative emotions, and fewer certainty and hesitation words."

Investors interested in looking out for some of these tendencies of deceptive managements can download the entire paper here.

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please consider subscribing to my feed.

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A Solid Yield For A Soft Drink Company

PepsiCo Inc. (PEP) is more than just soda. While PepsiCo is primarily known for its Pepsi cola, the food conglomerate also makes carbonated, non-carbonated drinks, and snack foods. If you have ever eaten snack foods then you have probably eaten a PepsiCo product. Have you ever had Doritos, Cap’n Crunch, or Tostitos? That’s all PepsiCo. Pepsi is responsible for the 7 Up, Frito Lay, Quaker Oats, Lays, Ruffles, Lipton Tropicana, and Aquafina brands as well.

The company has been around forever. Pepsi was founded back in 1890 by Caleb Bradham. Pepsi operates in the highly competitive soft drink market. The company’s chief competitor is Coca Cola which is the largest soft drink company in the world. PepsiCo has managed to differentiate itself from competitors with its large number of offerings in the food and beverage industry. Today, Pepsi generates over $60 billion dollars in sales selling hundreds of brands around the world.

PepsiCo has grown into the behemoth that it is today by making a number of shrewd moves. The first move was merging with Frito Lay allowing the company to enter the snack foods market. Next, the company added Tropicana and Quaker Oaks over the past 13 years. PepsiCo recently agreed to purchase its bottling company, The Pepsi Bottling Group. The merger will lower production costs and save Pepsi millions of dollars on bottling and distribution.

Pepsi is a financially strong company and the management team has done an outstanding job of managing company assets. PepsiCo has a 36.81% return on equity and a 10.28% return on assets. Operating margins and profit margins are impressive coming in at 17.3% and 12.7% respectively. The only issue for Pepsi is its large debt load of $24 billion dollars. This shouldn’t be a problem since the company creates huge amounts of free cash. Pepsi has earned $7.75 billion dollars year to date and has $4.75 billion dollars in cash on the balance sheet.

Shares of PepsiCo currently trade for $63 a share. The stock currently trades at 16 times earnings which is cheaper than competitors Coke and Dr. Pepper. Pepsi should be able to easily maintain its 7% growth rate over the next few years. The stock currently trades at two times book value and 1.7 times earnings growth.

PepsiCo investors are also getting a rock solid dividend. The food and beverage maker has increased its dividend for 38 consecutive years. Shares of Pepsi are currently yielding 3% which is right in line with the trailing dividend yield of 2.9%. The historical yield has been 2.3%. The payout is very reasonable with only 47% of earnings redistributed back to shareholders.

Pepsi is a reasonably attractive stock at its current price. The stock would be an absolute steal at $57.


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