There are few guarantees in life, but for those seeking to grow richer over time, buying quality, shareholder-friendly businesses is likely the most surefire strategy. Boasting 45 consecutive years of dividend growth, medical device maker Medtronic (MDT 0.12%) has a reputation for consistently sending more cash to its shareholders' brokerage accounts.
But should dividend growth investors add the stock to their portfolios at this time? Let's delve into Medtronic's fundamentals and valuation to find out.
Another quarter of decent operating results
With 49,000 patents in its portfolio for medical devices treating 70-plus conditions ranging from diabetes to Parkinson's disease, Medtronic has a dynamic business. That's precisely how the company served almost 80 million patients in its previous fiscal year.
Medtronic's net sales declined 0.5% year over year to $7.7 billion during its fiscal third quarter, ended Jan. 27. However, the company's results were better than they look at first glance. This is because Medtronic's global presence led to unfavorable foreign currency translation for the quarter to the tune of 4.9%. Adjusting for this factor, the company's net sales would have climbed by 4.4% in the quarter.
These solid results were driven by the company's significant patent portfolio. That is the result of steady investments that Medtronic has made in research and development (R&D). The company is on track to spend $2.7 billion on R&D, which will be right around 9% of the approximate $30 billion in net sales that it will generate during this fiscal year.
Medtronic posted $1.38 in currency-neutral non-GAAP (adjusted) diluted earnings per share (EPS) for the third quarter. That is up 1.5% over the year-ago period. A rise in operating expenses resulted in a 130-basis-point drop in non-GAAP net margin to 22.4% in the quarter. But this decreased profitability was partially offset by a 1.4% reduction in the company's weighted-average diluted share count.
Looking out over the next five years, analysts are projecting that Medtronic's adjusted diluted EPS will grow by 2.2% annually. Given that the Ireland-based company's adjusted diluted EPS grew at a 5.2% annual rate over the last five years, analysts could very well be selling Medtronic short.
Image source: Getty Images.
Expect decent dividend growth
Medtronic's 3.3% dividend yield is well above the S&P 500 index's 1.7% yield. But that's not all that there is to like about the company. Medtronic's quarterly dividend per share has rocketed 162% higher over the last 10 years. And it looks like the company is well on its way to becoming a Dividend King near the end of this decade.
MDT Dividend data by YCharts
This argument is supported by the fact that Medtronic's dividend payout ratio will clock in at just below 52% for fiscal year 2023. This manageable payout ratio allows the company to retain the funds needed to finance growth projects and repay debt. That's why I believe that dividend growth should remain healthy in the future.
A good value for a great business
Foreign currency headwinds and weaker-than-expected demand have weighed on shares of Medtronic over the last year. The stock has fallen 19% during that time. This has pushed Medtronic's forward price-to-earnings (P/E) ratio down to just 15.6, which is well below the medical devices industry average forward P/E ratio of 24.9.
Such a cheap valuation presents a very low bar for Medtronic to clear, which currently makes the stock a smart buy for the long term.
