Investors looking for reliable cash returns should be well familiarized with dividend aristocrats like Medtronic (NYSE:MDT). Members of this elite class have successfully increased their dividends every year for at least 25 years.
This giant medical device manufacturer enjoys resistance to economic downturns, and highly effective research and development programs. Medtronic has steadily raised distributions at an impressive rate without over-extending itself. Here's a closer look at that dividend, and why Medtronic might remain an aristocrat for years to come.
Over the past decade Medtronic has increased its dividend at a CAGR of 12.8%. During the past three years it's done so using less than one third of net income. While it might be nice to see more of those earnings in your pocket, it's also good to know the company is finding opportunities for investing that money.
Medtronic may be the largest company solely focused on medical devices, but it is hardly a lumbering giant. It's R&D budget towers over competitors, but it also spends a lower percentage of its revenue on R&D.
One reason for Medtronic's ability to squeeze more sales from its R&D department comes from being first to market with innovative products. The company launched the first MRI-safe pacemaker -- the Revo MRI SureScan pacing system -- more than three years ago. Last month it moved beyond pacemakers when the first of 275 patients received MRI-safe cardioverter-defibrillator implants as part of a pivotal trial for FDA approval.
The competition is well behind. St. Jude Medical (NYSE:STJ) began a study for its Accent MRI-safe pacemaker about one year after Medtronic began selling the Revo in the US. Topline results from the trial should be available soon, and complete results are expected this December. Boston Scientific (NYSE:BSX) won EU approval for its MRI-safe pacemaker last July, but hasn't even applied in the US yet. The company began trials with its ImageReady pacing system just over a year ago.
The latest legal battle
The benefits of being quick to market don't end with MRI-safe pacemakers. The patent infringement feud between Edwards Lifesciences (NYSE:EW) and Medtronic, sparked in part because Medtronic successfully brought its CoreValve system to market months earlier than expected, took an unusual turn recently.
Last month a U.S. District Court issued a preliminary injunction against Medtronic's CoreValve system stating it infringed on patents for Edward's Sapien transcatheter heart valve. Both of these devices replace faulty aortic valves in patients unable to undergo open heart surgery.
The trouble is, CoreValve may be suitable for more patients than Edwards' Sapien device, meaning that a ban on the device could prevent some patients from receiving this particular type of treatment. As Medtronic notes in court documents, "if the injunction were permitted to go into effect, treatable patients may unnecessarily die" because of lack of access to the CoreValve system. Perhaps due to this safety concern, a federal appeals court delayed the injunction a week after it was filed.
The CoreValve infringement suits were hardly a surprise, and the latest injunction isn't the first. You can argue back and forth about the "willful" nature of the infringement. The thing we can be sure of is Medtronic's ability to quickly bring a product to the market and then keep it there.
Medtronic is also using that hefty R&D budget to develop innovative products years ahead of the competition. High switching costs for surgeons give the company a degree of pricing power, and that's a formula for long-term dividend growth that you can depend on.
Cory Renauer owns shares of Medtronic. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of General Electric Company, Johnson & Johnson, and Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.