Healthcare companies can be safe places to invest your money in over the long term, especially when you're looking at some of the largest ones in the sector, such as medical-device maker Medtronic (MDT -0.35%). At $145 billion, its market cap makes it one of the top healthcare companies in the world.
Its business is also diverse, ranging from insulin pumps to surgical tools, cardiac devices, and many other products. Plus, the shares pay an above-average yield. Could Medtronic be the long-term healthcare stock you need for your portfolio?
Sales were flat last quarter, but earnings still rose
On Feb. 22, Medtronic released its latest earnings numbers, which didn't appear all that impressive. Sales of $7.8 billion for the period ended Jan. 28 showed no year-over-year growth. But the positive was that the company's net income of $1.5 billion did rise by 16%. That's because Medtronic was able to keep its operating expenses down, including restructuring charges, which fell from $83 million to just $12 million this past quarter.
Overall, the company saw it as a positive that while COVID-19 negatively interrupted normal hospital activity, Medtronic was still able to generate positive earnings growth. And investors should agree with that sentiment as it would be understandable to see a decline in demand. Now, however, with COVID-19 hospitalizations on the decline, Medtronic could make for a solid recovery stock. And that may not be the only reason to consider investing in it.
An above-average and growing dividend
Another of the more attractive features of Medtronic's stock, besides the company's resiliency, is its dividend. At 2.3%, it's paying well above the S&P 500 average of 1.4%. On a $10,000 investment, that can mean an extra $90 in annual revenue.
That may not seem like much, but over time, it can accumulate, especially since Medtronic is a Dividend Aristocrat. The company has been increasing its dividend payments for 44 years in a row. Its quarterly dividend payment of $0.63 is 47% higher than the $0.43 it was paying out five years ago. That averages out to a compound annual growth rate of 7.9%. Medtronic's most recent dividend hike was an 8.6% boost last year from $0.58 to its current payout.
Even with all those increases, Medtronic's payout ratio remains sustainable at 68%, suggesting there is room for generous rate hikes in the future.
Is Medtronic a cheap buy?
Trading at around $110, Medtronic's stock isn't far from its 52-week low of $98.38. And that's with its shares rising close to 5% this year while the S&P 500 has fallen 12%. In terms of valuation, Medtronic is currently trading at 30 times earnings. That's high compared to the Health Care Selector SPDR Fund, where the average is a multiple of less than 23.
Even when looking at forward earnings multiples, Medtronic is trading at 19 times its future profits while the fund's average is just over 16. Investors are paying a premium for Medtronic's stock even as it trades near its lows for the year. So the question is whether it's worth it or not.
Should you buy shares of Medtronic?
Medtronic could be an ideal stock for risk-averse investors to own right now. Between its dividend and the stability the business offers -- being able to generate earnings growth amid a tough environment -- it's a safe stock to hold for both the short and long term, even at a slightly high price tag.
While its earnings multiple doesn't make it an outright steal, the valuation also isn't obscene enough to suggest the stock is significantly overpriced or due for a massive correction. If you're looking for a safe long-term buy, Medtronic could be a great stock to add to your portfolio.