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Medtronic: An (almost) Dividend King presenting a record high Dividend Yield!

Opdateret: for 1 dag siden

Medtronic plc (MDT) is a global leader in medical technology and operates in the healthcare industry, specializing in the development, manufacturing, and distribution of a wide range of medical devices and technologies.

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money.

This post is written by Caio Daud. A popular investor on eToro. Learn more about Caio here:

Caio is proud to say he is a Dividend Growth Investor. He is the founder of the Income Growth Office and is passionate about dividends. When he is not reading a book about investing, he is annoying his family and friends with new investment ideas or bragging about a company that has just increased their dividends.

The Income Growth Office is a community managed by seasoned investors. We differentiate ourselves as a community aligned by a profound belief in the potential of Dividend Growth Investing. Follow us on Instagram (The Income Growth Office (@incomegrowthoffice) • Instagram photos and videos) to have access to our FREE Newsletter: My Second Salary. You can check live or copy our Dividend Growth Portfolio, on eToro (@CaioDaud).

If you want want to purchase shares or fractional shares in Medtronic, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.

Medtronic is dedicated to improving the lives of people through its innovative healthcare solutions. The company focuses on addressing different medical conditions and with the following core areas of expertise:

[a]. Cardiac and Vascular Group: main offerings are pacemakers, defibrillators, heart valves, and stents

[b]. Minimally Invasive Therapies Group: in this business unit, we can find technologies for surgeries related to gastrointestinal, respiratory, and musculoskeletal systems, among others.

[c]. Restorative Therapies Group: here, the company provides neurostimulation devices, spinal implants, and other solutions that help manage chronic pain and other disorders.

[d]. Diabetes Group: MDT is a key player in market for diabetes cares, providing insulin pumps, continuous glucose monitoring systems, and other diabetes management technologies. These innovations contribute to improving the quality of life for individuals with diabetes.

Medtronic is dedicated to advancing the well-being and healthcare of individuals. I firmly believe that the healthcare industry is robust, with healthcare being an essential and non-negotiable priority for people, irrespective of the global economic conditions. Given this fundamental need, I envision Medtronic, with its innovative products, as well-positioned to thrive and generate a steady cash flow across all economic cycles.

This healthcare giant is present in 150 countries and is known for making heavy investments in R&D: for the twelve months ending in October 2023, the company has invested $2.694B.

In parallel, MDT has partnered with several entities, in order to increase its innovation footprint and impact:

[a]. Thurgood Marshall College Fund (TMCF) Collaboration:

Initiative: Research & Development Engagement program

Grants: Five grants of $40,000 each

Objective: Focused on STEM, medical technology, and business research at select Historically Black Colleges and Universities (HBCUs)

Timeline: Ongoing collaboration since 2020

[b]. Kings College Hospital Partnership:

Funding Received: £2.5 million

Purpose: Real-world trial of GI Genius in NHS hospitals across the UK

Technology: AI-powered device for detecting colorectal abnormalities

Timeline: Funding received in June 2023

[c]. Science Based Targets Initiative (SBTi) Involvement:

Commitment: Joined the initiative

Objective: Setting ambitious emissions reduction targets for carbon neutrality

Collaboration: Involvement with over 4,600 organizations globally

Timeline: Participated earlier in the year

In my view, these partnerships, combined with the existing product offerings and substantial investments in research and development, position MDT to not only sustain the quality and broad application of its current products but also to adapt to future trends and uphold its commitment to excellence.

Now changing to the stock’s performance, MDT has been basically flat in last 10 years:

It has reached a record high of $134,63 per share in August 2021 and now trades at $81,92 (at the time of this writing).

Stock’s price can be partially explained by the COVID-2020 pandemic: elective surgery postponements and subsequently supply chain shortages had created disruptions in growth for the company. More recently, inflationary pressures further impacted the company's gross margin and the stock rallied in accordance with the whole healthcare sector. However, Medtronic's recent earnings report, released on November 21, indicates a return to sales growth within mid-single-digit (in accordance with management’s target), driven by new product launches supported by significant investments in research and development (figures mentioned in the beginning of this text).

Another important factor that explains stock’s performance was the the impact of breakthrough drugs, such as Ozempic, Mounjaro, and Wegovy, on demand for certain medical products. However, management reassures that the company's exposure to cardiovascular and diabetes products remains resilient.

Despite potential shifts in healthcare patterns related to weight management drugs, Medtronic's diversification, commitment to innovation, and presence in emerging markets position it for long-term growth.

To complete our analysis on MDT, let’s look at its debt profile:

Medtronic has 0% of variable debt! In times of high interest rates, this is an outstanding feature we want to see in our companies. Moreover, 82% of MDT’s debt is set to mature only in 2028 onwards.

The most recent projections for US interest rates suggest a range of 4% to 4.5% by the conclusion of 2024. Looking ahead to 2028, when Medtronic (MDT) is set to refinance the most significant portion of its debt, there is a possibility that the Federal Reserve (FED) could have ample time to implement interest rate reductions, creating a favorable environment for managing debt.

Medtronic strikes a Credit Rating of “A”, which confirms our positive outlook for the company.  

Now, let’s dive in the most fun part: dividends!

Medtronic needs just more 5 years to enter in the most noble group of dividend growers: Dividend Kings.

It has been increasing its dividends, consistently, for 45 years in a row with an average annual increase of 8% (last 5 years):

To have such a tracking record of dividend growth and still increase at this pace is not common attitude in market.

Latest dividend increase was quite small (1,5%), but this has been a tendency on the broad market in 2023. This can be easily understood by checking VOO, the Vanguard ETF that tracks the SP500. It had a dividend increase of 2,1% for 2023.

MDT’s dividend is well covered by its earning (or cash flow if we prefer):

Considering the projected sales growth we mentioned before, I think MDT’s dividend growth is well covered for the next years.

Now, if we combine Medtronic’s impressive dividend growth tracking record with its poor stock’s performance, we reach a record high dividend yield:

We may have lost the peak at 4% (last November), but still, we are 48% higher than the last 5-year average (2,28%)!

So, under the Dividend Yield Theory, MDT is unbelievably discounted.

Also, under a P/E perspective, it is discounted in relation to itself (14% discount):

My personal target price for MDT is $61,28, but I’ll start adding to my position at $67,41 (not a financial advice).

One last important factor to take into account, which is positive and negative is that Medtronic is based in Dublin, Ireland. Which means, it gives international exposure to our portfolio, but at the same time its dividends are taxed at 25%, not the usual 15% tax on American companies.

To conclude, I think Medtronic is presenting interesting price levels, depending on the valuation model used, it can present up to 48% discount to its fair value.

The company has rallied a lot in the last years mainly due to consequences of COVID-2020, high interest rates and threats of new drugs in the market. According to management, those obstacles have been overcome and now they expect the regular sales growth to be resettled

Dividends still make only 60% of earnings AND cash flow, combined with Medtronic’s debt profile and dividend growth tracking record, it seems like it is only a matter of time for the desired seat at the Dividend Kings table to be conquered.

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