Investors looking to build life-changing wealth ought to pay attention to stocks that have been able to outperform the broader markets over the medium term. That's because only the highest-quality stocks tend to do so.
Large-cap medical devices maker Stryker (SYK -0.46%) fits that bill, beating out the return of the S&P 500 index over the past five years. The stock has increased 100% against the S&P 500's 90% gains during that time. Stryker looks well-positioned to outdo the S&P 500 over at least the next five years as well. Let's dig into three reasons why I believe this is the case.
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1. Growth outlook remains intact
Stryker's earnings results were mixed in the fourth quarter ended Dec. 31. The company beat analysts' revenue expectations during the quarter but fell just short of their consensus for non-GAAP (adjusted) diluted earnings per share (EPS).
Despite the COVID-19 pandemic, Stryker has surpassed analysts' revenue predictions in six out of the last eight quarters. What's more, the company exceeded the analyst consensus for adjusted EPS in five out of the past eight quarters.
Stryker reported $4.70 billion in net sales during Q4, up 10.3% over the year-ago period. This was slightly higher than the $4.65 billion in revenue that analysts were expecting for the quarter. Organic sales growth provided a 9% boost to Stryker's net sales in Q4 in spite of disruptions to elective procedures in December stemming from the omicron variant of COVID.
The revenue growth was driven by six product launches in 2021. This includes the T7 personal protection system for surgeons while performing surgical procedures and Stryker's next-generation surgical sponge counting technology known as the Surgi-Count+ safety-sponge system.
Another 2.1% of Stryker's net sales growth was due to the company's acquisition of Wright Medical Group, which didn't close until November 2020 -- halfway through Q4 2020. Stryker's organic sales growth and growth from acquisitions were partially offset by unfavorable currency translations, which weighed on net sales growth by 0.8%.
Stryker's adjusted diluted EPS declined 3.6% year over year to $2.71 in Q4. This narrowly missed the analyst consensus of $2.72. Stryker's narrow earnings miss can be explained by two factors. First, the company's non-GAAP net margin dropped 310 basis points year over year to 22% in Q4. Secondly, a 0.4% increase in diluted shares outstanding to 382.7 million reduced the amount of profit that each share produced.
Stryker's commitment to research and development should lead to more product launches down the road. That's why analysts anticipate that the company will deliver 11% annual earnings growth over the next five years. This would be basically in line with the 12% annual earnings growth over the previous five years, which should translate into inflation-crushing return potential for the stock.
2. A dividend with room to grow
Another reason for investors to like Stryker is its dividend. The stock's 1% dividend yield isn't going to blow dividend investors away. But it will likely be raised at a healthy rate for the foreseeable future.
Stryker's dividend payout ratio in 2021 was just 27.7%. This gives the company flexibility to hand out generous dividend increases, complete bolt-on acquisitions, and repay debt to drive earnings higher.
Considering the low-double-digit, annual earnings growth forecast for the next five years, I expect to see at least a similar rate of dividend growth during that time.
3. Valuation isn't spectacular, but it's sensible
The final reason to think about buying Stryker is the stock's valuation, which doesn't seem excessive. Stryker is currently trading at a forward price-to-earnings (P/E) ratio of 24.4. This is moderately lower than the medical devices industry average forward P/E ratio of 26.3, which compensates for the fact that Stryker's 11% annual earnings growth potential is lower than the industry average of 14%.
Stryker's strong fundamentals and fair valuation make it likely that the stock will continue to beat the market.
