Medtronic PLC is a medical technology stock. It earned record profits in the year ended April 28. It’s expected to earn record profits in fiscal 2018 (which began April 29) and next year. Buy for long-term share price gains as well as decent and growing dividends.
Thanks to the company’s growing earnings, Medtronic PLC (NYSE—MDT) has raised its dividend for 39 years in row. Over this period, the ‘dividend aristocrat’ has raised its dividend at an excellent average yearly compound growth rate of 18 per cent. We expect Medtronic to keep raising its dividend each year.
Unfortunately, Medtronic’s ‘tax inversion’ means it’s now an Irish company. As a result, your dividends face a 15 per cent withholding tax. The company’s website says Americans can avoid this tax. But it makes no mention of Canadian investors.
Medtronic is the world’s largest manufacturer of implantable biomedical devices. Its focus is on “alleviating pain, restoring health and extending life for millions of people”. With aging populations in developed countries, demand for its devices should continue to grow. The company sells its products in over 160 countries. As emerging countries become more affluent, we expect overseas demand to grow even faster.
In the year to April 28, Medtronic earned $6.395 billion, or $4.60 a share (all numbers in U.S. dollars). This was up by 5.3 per cent from $6.228 billion, or $4.37 a share, the year before. This excludes foreign exchange fluctuations. What helps make this more impressive is that fiscal 2016 had an extra week. The company estimates that this added 8 to 10 cents to its earnings per share that year.
Global sales rising for all segments and markets
A second plus was that Medtronic’s sales rose in all four segments: Cardiac and Vascular Group’s sales increased by 3.1 per cent, to $10.535 billion; Minimally Invasive Therapies Group’s sales went up by 3.5 per cent, to $9.902 billion; Restorative Therapies Group’s sales advanced by 2.5 per cent, to $7.367 billion; and Diabetes Group’s sales climbed by 4.1 per cent, to $1.940 billion.
A third plus was that Medtronic’s revenue rose everywhere: U.S. revenue inched up by 1.5 per cent, to $16.633 billion; other developed markets’ revenue rose by 3.9 per cent, to $9.041 billion; emerging markets revenue climbed by 9.1 per cent, to $4.04 billion. While U.S. revenue accounted for 56 per cent of the total, foreign revenue is growing faster. If this continues, the U.S. will eventually account for less than a half of the revenue.
In fiscal 2018, Medtronic’s earnings are expected to rise by seven per cent, to $4.92 a share. Based on this estimate, the shares trade at a price-to-earnings, or P/E, ratio of 17.3 times. Next year, the company’s earnings are expected to climb by 9.6 per cent, to $5.39 a share. This works out to a better P/E ratio of 15.8 times.
Medtronic “reiterated its long-term expectation of mid-single digit revenue growth and double digit EPS [Earnings Per Share] growth”.
The consensus recommendation of 10 analysts is ‘buy’. We agree. Medtronic remains a buy for long-term share price gains as well as decent and growing dividends.
This is an edited version of an article that was originally published for subscribers in the June 9, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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