Medtronic is the world’s largest medical device company. Medtronic’s therapies help 72 million people annually.
The company’s success has led to a market cap of $145 billion and annual sales of $27.9 billion. And, Medtronic is a Dividend Aristocrat thanks to its 43 consecutive years of dividend increases. The company’s most recent dividend increase came on August 21; a 7.4% increase.
Medtronic’s (MDT) long dividend history stands out. A company simply cannot increase its dividend year after year and decade after decade without a strong and durable competitive advantage.
The company’s most compelling competitive advantage is its intellectual property and innovation within the complex healthcare sector. Medtronic has filed more than 53,000 patents and spends more than $2 billion annually on research and development.
This may be why the company has attracted robust institutional ownership. More than 80% of the company’s shares are owned by institutions. Even Perceptive Advisors – which typically invests in less mature health care companies – has a small stake in Medtronic.
Innovation and patents have led to long-term dividend growth. While the company’s stock currently has a rather pedestrian 2.2% dividend yield, dividend increases should be expected annually moving forward.
It’s important to note that Medtronic has established tax residence in Ireland to reduce its corporate tax rate. Therefore, Irish dividend withholding tax may automatically apply to Medtronic’s dividend payments to shareholders. Investors can typically get an exemption from this tax, however.
Growth in Medtronic’s dividend has come even during recessions. During the Great Recession from 2007 through 2009, Medtronic managed to generate earnings-per-share growth and dividend per share growth each year.
With that said, the company has struggled more during the COVID-19 economic decline. Adjusted earnings-per-share fell 51% versus the same quarter a year ago in the company’s most recent earnings release from August 25th. Even with this decline, the company generated adjusted earnings-per-share of $0.61 in the quarter which still cover the company’s $0.58 quarterly per share dividend.
Outside of recessions, we expect Medtronic to continue growing. Continued long-term share repurchases will aid in increasing earnings on a per share basis. And the company’s pipeline of new innovations and patents could lead to further gains in market share. Overall, I expect both earnings-per-share growth and dividend growth of around 7% annually moving forward.
On the downside, Medtronic shares appear to be somewhat overvalued at current prices. The company is currently trading for a price-to-earnings ratio of ~24 using expected earnings for this fiscal year. For comparison the company has traded for around 15 to 20 times earnings over the last 7 years.
While now is not an ideal entry point to purchase shares of Medtronic, the company makes a quality long-term holding for rising dividend income. It is one of the safer and more consistent healthcare securities around as evidenced by its long dividend history and resiliency.
Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
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