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Medtronic Inc (MDT) Dividend Stock Analysis

Summary

-Medtronic Inc. (MDT), is a global medical technology company.
-Five year average revenue growth: 9%
-Five year average earnings growth: 11%
-Five year dividend growth: 19%
-Current dividend yield: 2.70%
-I find the company stock attractive at the current price, with a P/E of under 11.

Overview

Founded in 1949, Medtronic, Inc. (NYSE: MDT) is a medical technology company focusing on alleviating pain, restoring health, and extending life for people all over the world. With over 40,000 employees and a market capitalization of over $35 billion, Medtronic is the world’s largest independent medical technology company.

More than 40 percent of company revenue comes from outside of the United States. The company markets its products in over 120 countries.

Operating Segments

The company is divided into seven operating segments. It’s worth noting that between 2009 and 2010, all seven segments reported an increase in revenue.

Cardiac Rhythm Disease Management
This segment accounts for $5.268 billion in sales for 2010, which represents 33% of total Medtronic company sales. Sales growth of this segment was 5% for this year. Products in this segment include pacemakers, implantable defibrillators, leads and delivery systems, ablation products, electrophysiology catheters, and other products.

Spinal
This segment accounts for $3.500 billion in sales, which represents 22% of total sales. Sales growth of this segment was 3% for this year. Products in this segment include thoracolumbar, cervical, neuromonitoring, surgical access, and more.

Cardiovascular
This segment accounts for $2.864 billion in sales, which represents 18% of total sales. Sales growth of this segment for this year was 18%. Products include coronary stents, delivery systems, heart valve replacement systems, and more.

Neuromodulation
This segment accounts for $1.560 billion in sales, which represents 10% of total sales. Sales growth of this segment for this year was 9%. Products include implantable systems for treatment of chronic pain and movement disorders, among other things.

Diabetes
This segment accounts for $1.237 billion in sales, which represents 8% of total sales. Sales growth of this segment for this year was 11%. Products include insulin pumps and disposable products.

Surgical Technologies
This segment accounts for $963 million in sales, which represents 6% of total sales. Sales growth of this segment for this year was 12%. Products of this segment are used to treat ear, nose, and throat conditions.

Physio-Control
This segment accounts for $425 million in sales, which represents 3% of total sales. Sales growth of this segment for this year was 24%. Products in this segment include defibrillators and monitoring systems.

Geographic Reach

Of total Medtronic 2010 company sales, $6.451 billion came from outside of the United States. This represents 41% of total Medtronic company sales. This number is an increase of nearly 15% compared to 2009 international revenue of $5.612 billion

Revenue, Earnings, Cash Flow, and Margin

The company has an impressive and consistent growth record.

Revenue Growth

Year Revenue
2010 $15.817 billion
2009 $14.599 billion
2008 $13.515 billion
2007 $12.299 billion
2006 $11.292 billion
2005 $10.055 billion

Over this five year time period, Medtronic has grown revenue by over 9% annually on average.

Earnings Growth

Year Earnings
2010 $3.099 billion
2009 $2.070 billion
2008 $2.138 billion
2007 $2.802 billion
2006 $2.547 billion
2005 $1.804 billion

Over this period, Medtronic has grown net income by over 11% annually, on average. Costs of acquisitions, restructuring, and litigation have made earnings a bit erratic.

Operating Activity Cash Flow Growth

Year Cash Flow
2010 $4.131 billion
2009 $3.878 billion
2008 $3.489 billion
2007 $2.979 billion
2006 $2.220 billion
2005 $2.824 billion

Over this five year time period, cash flow has grown by an average of 8% per year on average. 2005 was a high year for cash flow, and that skews the growth figures down for this five year period. If the cash flow growth is calculated over the four year period from 2006 through 2010 instead, then the annual cash flow growth is calculated to be 17%. The huge difference between calculating cash flow over different but very similar periods shows that one must be careful when estimating growth.

Together, the cash flow growth and the earnings growth show the growing profitability of this company. Cash flow was a bit erratic in 2006 while earnings growth was very strong. In contrast, over the 2008-2009 period, earnings were a bit erratic while cash flow growth was very strong.

Metrics

MDT’s net profit margin is approximately 20%. Return on Equity (ROE) is over 21% and Return on Investment (ROI) is over 14%.

In comparison, medical device maker Becton Dickinson (BDX), has a profit margin of approximately 16%, ROE of over 21%, and ROI of over 17%. Medtronic has the stronger margin while Becton Dickinson has the stronger returns on equity and investment (BDX obtains the same ROE with less leverage).

Dividends

Medtronic currently has a dividend yield of 2.70% and has a solid record of consecutive dividend increases.

Dividend Growth

Year Dividend Yield
2010 $0.88 2.70%
2009 $0.8025 3.00%
2008 $0.6875 1.30%
2007 $0.485 0.90%
2006 $0.42625 0.80%
2005 $0.3725 0.70%

Over this five year period, Medtronic has grown its dividend by nearly 19% per year on average. This is a fairly exceptional dividend growth rate. During the most recent period between 2009 and 2010, the dividend payment per quarter grew by approximately 10%. The dividend payout ratio is currently a low 27%, so there is plenty of room to continue growing the dividend into the future.

Looking at historical dividend yields, this company was quite overvalued in the past. Indeed, throughout the past decade, Medtronic has had a high P/E and therefore a low dividend yield.

Balance Sheet

Medtronic has a moderately strong balance sheet, with a current ratio of 1.80 and a total debt to equity ratio of 0.72.

Investment Thesis

Looking at Medtronic’s numbers, one would have trouble determining whether there even was a recession, when it occurred, for how long, and what its magnitude was. Revenue and corresponding cost of goods sold has grown like clockwork. Earnings growth has been substantial as well, but somewhat erratic due to timing of acquisitions and litigation.

Medtronic focuses on two main segments: developed countries and emerging markets. In developed countries, Medtronic focuses on cutting-edge innovation to increase the options of medicine to higher levels, while in emerging markets the focus is on building distribution, training, education, and other healthcare infrastructure.

In foster innovation, Medtronic has an internal venturing program called the Quest program. In the Quest program, employees apply for Quest grants, and a team of senior employees reviews the applications and determine which projects will receive up to $50,000 in initial internal funding. 165 grants have been awarded since 1989, and 25% of them eventually become a project or a part of therapy.

In fiscal year 2010, the company launched several new products including a low-glucose suspend insulin pump, a pacemaker designed to better endure an MRI, a new treatment for rhinosinusitis, and many more. More than 60 new products are planned to be launched around the world over the next two years.

To reach emerging markets, Medtronic forms partnerships with local businesses. Medtronic formed a partnership with China’s leading manufacturer of medical devices, Weigao, to get access to thousands of Chinese spinal surgery patients. Medtronic gains by increasing their global reach and local knowledge, while Weigao gets increased international recognition and increased technical expertise.

Medtronic has been a highly valued stock throughout the decade. Currently, the company has a P/E of under 11 despite the good growth prospects, increasing dividend payments, and a fairly clean balance sheet. In August, Medtronic reported that high unemployment and insurance costs have resulted in fewer people going to the doctor, and therefore fewer people using Medtronic devices. The company then cut its 2011 revenue growth projections down from 5-8% to 2-5%. Medtronic stock fell 10% that day. Medtronic stock has generally been falling throughout 2010. I don’t know what the market will do in the short term, but I think that the current stock valuation is undervaluing the company. Market overreaction and uncertainty give value investors great opportunities to buy shares of some of the best companies around.

Medical devices should be in global demand over the next several decades as more and more people in emerging markets have access to them. Medtronic’s fast international revenue growth showcases this trend.

Risks

Like any company, Medtronic faces risk. The business faces regulatory risks and device approval risks, commodity cost risk, political risk, and currency risk. Since the company develops complex products for millions of people worldwide, innovation and new product development is important and reliant on beneficial research and development. In addition to this, due to the complexity and reach of their products, and the fact that they drastically affect patient lives, MDT faces various litigation risk.

Conclusion and Valuation

In conclusion, I find Medtronic stock to be attractive at current prices. It’s got a great growth history and great future prospects. The valuation is quite low with a P/E of under 11. This company was overvalued for a while, and now that the sheen has worn off, the market is left with a great company that is undervalued. Its revenue growth and dividend growth won’t be quite as high as previous years, but should be substantial, and higher than the valuation would imply.

Full Disclosure: I do not have any position in MDT at the time of this writing, but it’s on my buy list. I own shares of BDX.
Update: I now currently own MDT stock.
You can see my full list of individual holdings here.

Further reading:
Colgate Palmolive (CL) Dividend Stock Analysis
Molson Coors (TAP) Dividend Stock Analysis
Canadian National Railway (CNI) Dividend Stock Analysis
CVS Caremark Corporation (CVS) Dividend Stock Analysis
Consolidated Edison (ED) Dividend Stock Analysis

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Comments

  1. Update: Medtronic recently boosted its dividend payment by 7.7%.

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