In investing, short-term volatility often leads to long-term opportunities. This means that deep bear markets in stocks in the near term can result in valuations that are detached from reality.
But since such markets can sometimes be justified by poor business fundamentals, it can be difficult to separate the wheat from the chaff. The best way to do this, in my opinion, is to focus on stocks that have increased their dividends for decades. Because only a select few businesses are great enough to pull this off, this is arguably a reliable indication of quality.
With a track record of nearly a half-century of uninterrupted dividend growth, medical device maker Medtronic (MDT -1.41%) has established itself as a reliable dividend grower. But is the strong dividend stock a buy for income investors near its 52-week low share price of $76? Let's take a closer look at Medtronic's fundamentals and valuation to find out.
A bastion of cutting-edge invention
Since its 1949 founding by a couple of engineers in Minneapolis, Minnesota, Medtronic has ascended like a phoenix. From the beginning, the company had always displayed an innovative spirit. Medtronic became the first company to manufacture an implantable pacemaker.
Thanks to this passion for creativity, Medtronic possesses nearly 50,000 patents in its product portfolio that treat tens of millions of patents around the world every year. And as you can imagine, this product portfolio is well diversified, treating common conditions, including diabetes, sinusitis, and obesity.
Nearly three full years into the COVID-19 pandemic, Medtronic has faced its share of issues along the way. This is because hospitals have often had to delay surgical procedures to focus on treating waves of patients diagnosed with COVID. Since Medtronic relies upon steady procedure volumes to generate its revenue and earn profits, this has weighed on its financial results in recent quarters. Coupled with the broader market decline, this explains how Medtronic has shed a third of its value since setting a 52-week high in April.
But the good news is that as Americans are increasingly vaccinated against COVID or infected, widespread immunity is within reach. This is why some public health experts expect the virus to become endemic in the U.S. four years after the onset of the pandemic in March 2020. Once this eventually does happen, COVID should be manageable enough that hospitals won't have to delay surgical procedures nearly as much to deal with it. This would help Medtronic's revenue and earnings revert back to its pre-COVID days.
As the company brings potentially hundreds more products to the market in the years ahead and COVID disruptions begin to diminish, solid earnings growth could again lie ahead.
Image source: Getty Images.
A long record of dividend increases
Stacked against the S&P 500 index's 1.7% dividend yield, Medtronic's 3.5% yield is quite appealing. And it gets even better: Medtronic has 45 consecutive years of dividend growth under its belt, an impressive feat for any company.
Given that the company's dividend payout ratio for the current fiscal year is poised to clock in at 51.6%, it's a near-certainty that Medtronic will eventually reach a record of 50 years. That is because such a payout ratio gives the company enough capital to reduce debt, execute share buybacks, and complete bolt-on acquisitions to further strengthen fundamentals. Not to mention that paying out half of its profits also leaves a buffer to maintain the dividend in the event of a temporary decline in profitability.
The best time in years to buy Medtronic
Outside of recent trading, the last time Medtronic's share price dipped down to $77 was in March 2018. Until COVID becomes endemic and doesn't materially interfere with procedure volumes, the near term could still be bumpy for Medtronic.
But considering the company's environment of innovation, Medtronic's overall fundamentals appear to be intact. This could make the stock a savvy buy before the end of this year for long-term investors.
