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Grab Some Healthy Dividend Growth With Medtronic

Aaron Levitt Mar 30, 2016


Health care remains one of the brightest spots when looking at longer-term investment ideas. The combination of an aging and growing population across the world is helping boost demand for the sector. That demand will only increase over time as the trends in place play out. With that in mind, investors have plenty of ways to cash in on rising long-term health care demand, from giant pharmaceutical firms to health insurers.


But only one offers the chance for high-tech growth and healthy dividend potential: Medtronic (MDT ).

As the largest medical device company, MDT has its hands on a variety of needed medical appliances. Those devices help the company produce some pretty cash flows. Add in a touch of new growth avenues and you have a recipe for continued success. All in all, MDT has the goods to be a top health care dividend stock for investor portfolios.


A Long History of Innovation


Medtronic basically created the implantable medical device field when it first started using electrical stimulation to treat irregular heartbeats back in the 1950s. In essence, MDT created the world’s first pacemaker and since then firm hasn’t looked back. Today, MDT is a health care juggernaut, clipping more than $20 billion in medical device-related revenues.

The vast bulk of those sales still comes from its cardiovascular division. The legacy business continues to perform well as its entrenched position as the sector leader has hospitals and doctors coming back for more. Further, MDT still leads in aortic valve replacement sales and sales of new innovations, such as drug-coated balloons and implantable diagnostics devices, have been steadily growing. This steady growth was further highlighted in Medtronic’s latest quarterly earnings report. Sales of cardiovascular equipment rose 7%.

That sales growth may seem like peanuts as it continues to digest its recent purchase of Coviden.

Buying Coviden added a whole arsenal of “lesser” medical devices to MDT’s quiver. Items such as urology products, IV tubing, traditional wound care items and syringes are the kind of single-use items that hospital’s go through by the ton. Those items are exactly what produce steady sales and cash flows. Ultimately, they will help augment MDT’s already juicy cash flows.

But Coviden was no slouch in the advanced medical device world either. The firm makes a variety of advanced surgery products, including those for cardiovascular surgery, that will compliment Medtronic’s current offerings. The buy also helps MDT to partner more closely with hospitals thanks to Coviden’s rich distribution network. That will provide plenty of benefits down the road as well.

Already, Coviden is doing its job within Medtronic. MDT’s new Minimally Invasive Therapies Group, which is mostly from Coviden, managed to see a 33% jump in revenue in the latest quarter.

And let’s not forget, Coviden was purchased through a tax inversion.


A Dividend Stalwart


That steady growth in its bread-and-butter businesses has helped the firm clip some impressive cash flow growth over the years. It’s free cash flow margins have averaged about 25% over the last few years. Anything above 5% is considered really, really good. With Coviden added, cash flows are set to explode.

MDT’s management estimates that it should be able to generate nearly $40 billion in adjusted free cash flows over the next five years. And it should get there based on just what it earned in the latest quarter. What’s more impressive is that Medtronic has pledged to distribute 50% of those free cash flows back to shareholders as dividends and share repurchases.

Already, MDT is considered a dividend aristocrat, having paid an increasing dividend for nearly 40 years. The last bump was a 25% jump. Over the 38 years, MDT has managed to grow its payout by an average compound annual growth rate of 18%. That’s beyond impressive already and doesn’t take into account any of the firm’s new initiatives or pledges.


Buy Some MDT


At a P/E of 44, MDT isn’t super cheap, even for a growth stock. However, Medtronic’s best days are still ahead. The firm is at the forefront of the need for more and better health care solutions. Meanwhile, the boring stuff like catheters, antimicrobial solution sponges, and blood collection needles, will keep the cash flows humming.

All in all, it may be worth your while to snag some shares of MDT even at such a high P/E ratio. In the long run that may seem like a real bargain.

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