Even after recording its second straight week of gains, the S&P 500 index is still down 6% year to date. Accelerating inflation and looming interest rate hikes from the Federal Reserve are among several reasons behind the market's poor start to this year. But amid the market volatility, some stocks have fared well.
The pureplay medical devices maker Medtronic (MDT 0.69%) has enjoyed 2% in gains year to date. And despite this outperformance, I believe Medtronic can continue to better the market. Here are four reasons to explain why.
1. A track record of consistently beating expectations
Medtronic reported earnings results for the third quarter in late February for the period ended Jan. 28. While the company missed analysts' revenue consensus for the quarter, it beat their predictions for non-GAAP (adjusted) diluted earnings per share (EPS).
Medtronic recorded $7.76 billion in revenue during the third quarter, which represented a 0.2% decline over the year-ago period. This came up just short of the $7.91 billion average analyst estimate for the quarter. But even with the COVID-19 disruptions to its business over the last eight quarters, Medtronic has surpassed the analysts' average forecasts in five of those quarters.
The company derives its revenue from selling medical devices that are used in elective procedures. That's why the temporary halt on elective procedures due to surging omicron variant case loads and staffing shortages at hospitals in January weighed negatively on Medtronic's operating results.
But factoring out the unfavorable currency translations during the quarter, the company's constant currency revenue would have been $7.9 billion. This would equate to a 1.6% year-over-year growth rate in revenue. This was powered by 7% growth in emerging markets and 1% growth in non-U.S. developed markets, while U.S. revenue was flat for the quarter.
Medtronic produced $1.37 in adjusted diluted EPS during the third quarter, which works out to a 6.2% growth rate over the year-ago period. This narrowly exceeded the analyst consensus of $1.36 for the third quarter, which was the seventh quarter out of the past eight that the company has done so.
A 120 basis-point, year-over-year expansion in the company's non-GAAP net margin to 23.8% was one piece of the puzzle that led Medtronic's earnings higher. And a 0.4% reduction in the outstanding share count to 1.35 billion helped to give shareholders a bigger piece of the profit pie.
Image source: Getty Images.
2. Product launches will drive future expansion
Looking out over the next five years, analysts anticipate that Medtronic's non-GAAP diluted EPS will compound at a 12% annual rate. What's behind this lofty growth outlook?
Medtronic is an innovative company. This is reflected by the fact that its commitment to research and development has led it to launch over 200 products in the U.S., Western Europe, Japan, and China over the last 12 months.
3. Dividend growth should remain robust
Medtronic has raised its dividend for 44 years straight, which is far more than the minimum of 25 years for an S&P 500 component to be considered a Dividend Aristocrat. And I believe this streak won't be coming to an end anytime soon.
That's because in addition to Medtronic's double-digit annual earnings growth potential, the stock has a secure dividend payout ratio. Based on the average analyst estimate of $5.66 in adjusted diluted EPS for the current fiscal year, Medtronic's dividend payout ratio would be 44.5%.
The company's ability to keep the majority of its profits after paying dividends to its shareholders should allow for a combination of debt repayment, share repurchases, and acquisitions to sustain business growth going forward.
This is why I'm expecting at least high single-digit annual dividend growth through the next several years. Paired with Medtronic's 2.3% dividend yield, this is an enticing blend of yield and growth prospects.
4. A discounted Dividend Aristocrat
Even with its recent performance, Medtronic still looks to be attractively valued. Its forward price-to-earnings ratio of 18.6 is significantly lower than the medical devices industry average of 26.2. Given that Medtronic's forecasted annual earnings growth rate of 12% is only a bit below the industry average of 14%, this makes it a solid dividend stock pick.
And if that wasn't enough, Medtronic's 2.3% dividend yield is moderately higher than its 10-year median yield of 2%. Since the stock's fundamentals are about as strong as they have ever been, the dividend yield should revert back to its historical norm at some point.
