Did you hear about the latest buy-one-get-one-free deal on Wall Street? With many of America's biggest companies reporting earnings this week, you easily could have missed the announcement.
On Monday, Oct. 24, Medtronic (MDT 0.89%) told investors of its intention to spin off a pair of businesses into a separate company. The streamlining is expected to help both the Medtronic that remains and the tentatively named NewCo grow faster than they currently can as a combined entity.
Of course, investors who buy shares of Medtronic now will most likely end up with shares of a slightly smaller Medtronic next year plus shares of the new company. Does this 2-for-1 deal make Medtronic a good stock to buy now? To answer we'll have to weigh reasons to buy the stock now against reasons to avoid it.
Reasons to buy Medtronic
In 2014, Medtronic acquired Covidien making it far and away the world's largest independent manufacturer of medical devices. Economies of scale allow the company to beat competitors on pricing for run-of-the-mill devices. A comprehensive catalog also makes Medtronic sales reps incredibly valuable to busy hospital administrators.
In addition to run-of-the-mill devices you can find in any hospital room, Medtronic funnels some of its enormous cash flows into the development of next-generation devices. During its latest fiscal year, which ended on April 29, the company conducted more than 230 clinical trials and earned roughly 200 product approvals worldwide. For example, Medtronic's robotic-assisted surgery system recently earned important marketing authorization clearances from regulators in Europe, Canada, and Japan.
Reason to avoid Medtronic
Constantly developing new innovative products has allowed Medtronic to raise its dividend payout every year since 1978. Over the past few years, though, the pace of payout raises has slowed considerably.
| Period | Dividend CAGR |
|---|---|
| Fiscal 1978-current | 16% |
| 20 years | 13% |
| 10 years | 10% |
| 5 years | 8% |
CAGR-Compound annual growth rate; Data source: Medtronic.
As a company that's already enormous, finding new sources of growth that can push its enormous needle forward is already a challenge. Lingering COVID-related restrictions and semiconductor shortages have limited Medtronic's ability to meet demand. Combined, these factors could slow down the pace of Medtronic's dividend raises in the years to come.
Looking ahead
Management expects its upcoming spinoff to complete in 12 to 18 months. Since the new company will be relatively small, management doesn't expect it to impact Medtronic's dividend policy when the separation finally takes place.
Image source: Getty Images.
During Medtronic's latest fiscal year, revenue from the patient monitoring and respiratory interventions businesses it plans to spin off reached about $2.2 billion. That worked out to just 7% of total revenue, so making modest payout bumps in 2023 and 2024 shouldn't be a problem.
The stock offers an above-average dividend yield of 3.2% at recent prices and the payout is well-funded. Over the past year, the company met its dividend obligations with just 60% of free cash flow generated by operations.
Supply chain issues notwithstanding, the company's robotic-assisted surgical business is poised to drive growth in the years ahead. We don't know when Medtronic's robots will receive regulatory clearance in the U.S. but recent approvals in the EU, Canada, and Japan bode well for this important new revenue stream. Spinoff or no spinoff, this looks like a smart dividend stock to buy right now.
