Friday, September 28, 2012

Medtronic, Inc - Stock Analysis

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. This dividend champion has paid dividends since 1977 and increased them for 35 years in a row.

The company’s last dividend increase was in June 2012 when the Board of Directors approved a 7.20% increase to 26 cents/share.

The company’s largest competitors include Baxter (BAX), Becton Dickinson (BDX) and St Jude Medical (STJ). Over the past decade this dividend growth stock has delivered an annualized total return of 1.20% to its shareholders.


The company has managed to an impressive increase in annual EPS growth since 2003. Earnings per share have risen by 10.60% per year. Analysts expect Medtronic to earn $3.66 per share in 2013 and $3.85 per share in 2014. In comparison Medtronic earned $3.22/share in 2012.

 The return on equity has largely remained between 19% and 23%, with the exception of a brief spike in 2006 – 2007 period. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 15.80% per year over the past decade, which is higher than the growth in EPS. The expansion in the dividend payout ratio allowed the company to raise distributions at a rate that is higher than earnings.
A 16% growth in distributions translates into the dividend payment doubling almost every four and a half years. If we look at historical data, going as far back as 1978 we see that Medtronic has actually managed to double its dividend every four years on average. The dividend payout ratio increased from 19% in 2003 to 30% in 2012. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently, Medtronic is attractively valued at 11.70 times earnings, has an adequately covered dividend and yields 2.70%. I would consider adding to my position in the stock subject to availability of funds.

 Full Disclosure: Long MDT

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