Successful long-term investing is more inaction than action. This means that investors should find thriving companies in growing industries, buy them, hold them, and occasionally monitor their fundamentals to make sure the investment thesis is intact.
As more innovative treatments are developed for chronic conditions, the global medical devices industry is expected to steadily grow. That's why the market research firm Precedence Research anticipates that the global medical devices industry will compound at 5.5% annually from $550 billion in 2021 to $850 billion by 2030.
As one of the largest medical device companies in the world, Stryker (SYK 0.58%) will be a major beneficiary of this positive industry outlook. Let's dig even deeper into why the stock looks like it could be a solid buy for dividend investors.
Another decent quarter for the company
Late last month, Stryker shared its earnings results for the second quarter ended June 30. The company reported $4.5 billion in net sales during the quarter, which was up 4.6% year over year. What was behind the modest net sales growth in the second quarter?
Between the second quarter of 2021 and the most recent quarter, Stryker launched several new products. In March, the company released its connected Power-PRO 2 powered ambulance cot. This product has an ergonomic transport handle to reduce the risk of injury to medics, as well as an improved hydraulic assembly to help medics perform an unassisted 700-pound lift of a patient.
As a result of continued innovation, Stryker was able to post organic net sales growth of 6.1% over the year-ago period. The acquisition of the digital care coordination and communication company Vocera Communications in February drove a 1.5% year-over-year lift in the company's net sales for the second quarter.
However, the U.S. dollar was comparatively stronger than other currencies in the second quarter. This led to a 3% unfavorable foreign currency translation during the quarter, which dampened a bit of the sales growth for the period.
Stryker recorded $2.25 in non-GAAP (adjusted) diluted earnings per share (EPS) during the second quarter, which was unchanged year over year. This fell just short of the average analyst expectations for the ratio but Stryker has still surpassed the adjusted diluted EPS analyst consensus in six out of the past 10 quarters.
Elevated inflation and continued challenges to its supply chain were the catalysts that caused the company's non-GAAP net margin to drop 90 basis points over the year-ago period to 19.1% in the second quarter.
The good news is that these headwinds should wane in the coming quarters. With the company's bolt-on acquisitions and new product launches, analysts believe Stryker's adjusted diluted EPS will grow 8% each year for the next five years.
Image source: Getty Images.
A viable dividend with strong growth potential
Stryker's 1.3% dividend yield is a bit lower than the S&P 500 index's 1.5% yield. But don't let the company's lower starting yield fool you: Stryker will be able to compensate for its lower immediate income with high dividend growth prospects.
The stock's dividend payout ratio is expected to be 28.9% in 2022. This should leave more than enough funds for debt reduction, future acquisitions, and share repurchases. And it should allow the dividend to grow slightly ahead of earnings growth for the foreseeable future. That's why I believe Stryker will deliver annual dividend growth of around 9% to 10% over the medium term.
The valuation is attractive
The Michigan-based medical devices behemoth clearly possesses a bright future. And the stock doesn't appear to be getting the recognition that it deserves from the market.
This is supported by the fact that Stryker's forward price-to-earnings (P/E) ratio is 21.8. For context, this is moderately lower than the medical devices industry's average forward P/E ratio of 24.6. Based on its high-single-digit annual earnings growth potential, a leading medical devices company like Stryker is arguably deserving of a higher valuation multiple. This is what makes the healthcare stock a buy for dividend investors.
