Dividend Aristocrat with 18% Historical Dividend Growth Rate Maintains Position on Best Dividend Stocks List
Alejandro Barreto Dec 12, 2018
Healthcare remains one of the brightest sectors when looking for longer-term investment ideas. Populations around the world continue to grow and age, and in that, demand for various healthcare needs have only skyrocketed. That’s allowed firms in the industry – as well as their investors – to profit handsomely as the trends take hold. This includes our Best Dividend Stocks List pick in the medical devices sector.
As one of the largest medical device firms, our pick provides plenty of the necessary gear for doctors and hospitals to treat patients. This covers everything from one-time-use basic appliances to higher-tech implantable devices and heart pumps. This huge product catalog of devices has continued to power the firm’s revenues, profit and cash flow over the years. This includes its big 14% jump in earnings and 6% increase in sales over the last quarter.
See the previous article on our pick here.
As impressive as that jump is, our pick isn’t done yet. Thanks to recent device approvals, a rich pipeline of new devices as well as a hefty dose of M&A, our pick has plenty of runway left to boost profits and sales even further. All of that will only strengthen its already impressive multi-decade run of dividend increases.
With the trends clearly in place and the wind at its back, our Best Dividend Stocks List pick in the healthcare sector could be exactly what your portfolio needs for both growth and income.
To summarize, here are five reasons why you should own this stock:
- Operates in over 160 countries with reported revenues of nearly $30 billion in 2017.
- Member of S&P 500 Dividend Aristocrats with a staggering 18% dividend-per-share growth rate over its history.
- Huge device portfolio spanning both low margin and high-tech medical devices.
- Ensured its multi-decade dividend-increase track record by increasing its dividend by nearly 9% during this year
- Healthy payout ratio of 39% and a growing yield of 2.17%.
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Medtronic Continues to Fire on All Cylinders
When it comes to the medical device world, our best dividend stock Medtronic (MDT ) pretty much rules the roost. The firm basically created the implantable medical device field when it first started using electrical stimulation to treat irregular heartbeats back in the 1950s. Since then, MDT has created a world-class portfolio of devices.
This portfolio of devices – covering everything from basic sutures and catheters to advanced spinal cord stimulation devices – has continued to power Medtronic’s profits and revenues for decades. Last quarter alone, MDT managed to sell more than $7.5 billion worth of devices and bring home more than $1.15 billion in profits, a year-over-year jump of 6% and 14%, respectively. This sort of continued growth is exactly why we added the stock back to our list in May of this year.
The best part is that this growth and the cash flows it provides can continue.
Our selection has continued to rack up new approvals for new devices and has continued to focus on more high-tech/higher-margined products. This includes items such as continuous glucose monitoring insulin pumps and a buyout of robotic surgery specialist Mazor Robotics. These higher-margined products serve to continue increasing MDT’s already impressive track record further.
With some impressive trends pushing it forward, let’s see if Medtronic still has a place in your portfolio today.
DARS – Relative Strength
At this point, the bear is really starting to growl in the broader stock market. As volatility has returned, many firms have now dropped by double digits. This is certainly the case in the healthcare sector. However, Medtronic has been a stalwart in all of this volatility. Investors continue to be drawn to its big portfolio of devices and the cash flows that it throws off. After all, dividends are one of the best ways to get through downturns.
With that, MDT stock is only about 9% below its 52-week high.
Believe it or not, this lack of heavy selling activity still means that momentum is firmly in place. And that’s just what our DARS model wants to see. As a result, Medtronic scores optimally: a perfect 5-out-of-5 for our Relative Strength metric.
DARS – Yield Attractiveness
Today, Medtronic has a forward yield of 2.17%. That’s a bit more than the medical devices sector and roughly in line with the broader S&P 500. For our DARS model, that’s all it needs to see as the yield fits within the optimal range for our Yield Attractiveness metric. So, once again, MDT scores another perfect score.
The amazing thing is this yield is roughly the same as when we selected Medtronic for our list back in May. The kicker is that shares have appreciated quite nicely since then and MDT managed to raise its payout by nearly 9% shortly after we made our selection. It managed to increase its payout by roughly 7% before we added it. This is a prime example of how our Yield Attractiveness metric works to find stocks that have the potential for a high total return.
DARS – Earnings Growth
None of this would matter if Medtronic wasn’t showing plenty of earnings power behind its product portfolio. But higher-margined devices and rising healthcare demand have continually benefited MDT’s bottom line.
To that end, analysts now expect MDT to earn $5.16 per share in 2019. That’s an 8.40% increase over what it is expected to earn this year. The best part is that Medtronic has managed to beat analysts’ estimates for both of its reported quarters this year and management has already indicated higher revenues and earnings.
This is great for both investors and our DARS model. Mid-to-high single-digit jumps to earnings highlight consistency of growth at a firm. And if MDT can squeeze out a bit more than expected, all the merrier. Thus, the stock scores another 5-out-of-5 for our model’s Earnings Growth metric.
DARS – Dividend Uptrend
Given its huge portfolio, strong cash flow origination, and dividend history Medtronic has long been a premium-priced stock. However, these days, that premium isn’t anywhere to be found. Today, MDT shares can be had for a forward P/E of 17. This has the stock trading for the same valuation as when we added back the stock to our list.
This is amazing considering that the firm has upped its dividend, increased its earnings guidance and reported better numbers on its bottom line.
Investors have basically been given a gift. Our DARS model picks up on this as it continues to favor stocks with P/Es within the range of approximately 13 to 20 as they offer the perfect blend of growth and income. And with that, MDT scores another perfect score in our Dividend Uptrend metric.
DARS – Dividend Reliability
Let’s just say that Medtronic has earned its Dividend Aristocrat title. With its last big increase to its payout, MDT has managed to raise its payout for 41 years straight. Moreover, it has grown its dividend by an average of 18% per year since it started increasing its dividend. That’s one heck of a feat. And it looks like the medical device stock still has the potential to keep that streak alive for a long time.
The reason is the firm’s healthy payout ratio of 39%.
This amount allows for plenty of wiggle room for Medtronic to raise its payout further and grow its business. This is before any additional earnings increases. Given its higher guidance and estimates, Medtronic should have no problem rewarding shareholders down the road.
This good payout ratio isn’t lost on our DARS model. The firm once again scores high on the model for Dividend Reliability.
The Bottom Line
When we first chose Medtronic for our Best Dividend Stocks List, we were drawn to the long-term trend of higher healthcare demand/spending. And based on MDT’s results since our selection, we were right on the money. The firm continues to make the right moves to provide higher-margined products and rake in plenty of sales. With all its DARS scores running at optimal levels, MDT’s overall score is a perfect 5-out-of-5. Its place on our coveted has been reaffirmed.
Keep track of the latest additions/removals in our News section, where we regularly publish the latest around dividend investing.
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