Medtronic (MDT -1.12%) is a massive business that's changing rapidly now to keep up with shifts in its markets and an evolving global economy -- all of which can make it a bit difficult for observers to understand it as an investment.
And with some weakness in its earnings starting to show up in results, shareholders and potential buyers alike are going to want to assess where the company stands.
Let's dive in and take a peek at three factors that smart investors appreciate about Medtronic so you'll be better prepared when it comes to your decision to buy, sell, or hold.
1. It's undergoing a comprehensive transformation
Per Medtronic's management, there's a massive transformation underway that's set to reshape the business and make it run more efficiently across a bevy of metrics. Everything from its supply chain to its management structure and even its corporate culture is apparently getting a revamp.
Smart investors know that such campaigns can bring major benefits, but also that concrete results are the ultimate arbiter of success. And in Medtronic's case, investors also know that no matter how much management wants to change things, it's hard to do when a company has a $121 billion market capitalization.
Perhaps the most relevant part of the plan for shareholders are the changes to its supply chain and manufacturing operations. In particular, those operations are getting heavily consolidated, with their methods becoming standardized, and with manufacturing scheduling getting a rehaul to better utilize raw materials and transform them into products in a timely manner relative to customers' needs.
All of that sounds great on paper, as it would help to juice the company's margins. But smart investors aren't going to buy or sell their shares just based on these plans -- they'll wait to see some solid results first.
2. Its acquisition spree is slated to continue
Wise investors keep a close eye on what their portfolio companies are doing when it comes to mergers and acquisition (M&A) activity. Whereas a smart purchase of a key start-up can drive growth for years or initiate much-needed diversification into a new line of business, an ill-fated acquisition can lead to what legendary investor Peter Lynch calls "di-worseifying" rather than diversifying.
In Medtronic's case, there's so much investment activity going on that there will probably be both hits and misses. Since its fiscal 2021, it has bought nine companies, spending around $3.3 billion in total. And in its fiscal 2023 so far, it's already made more than $950 million worth in investments for minority shares, partnerships, and other types of deals.
Management is explicitly looking to plant seeds for future returns with even more acquisitions and investments moving forward. Alongside increasing research and development (R&D) spending, finding bolt-on growth opportunities looks to be a higher priority than seeking organic growth via marketing and other avenues.
So smart investors can see that it'll likely succeed in its strategy of buying growth as a result of the emphasis that management is placing on it. But they can also appreciate that there's a sizable risk of accidentally picking up a few lemons along the way.
3. It's a few years away from earning a special status
When companies hike their dividend for 50 consecutive years without interruption or delay, they get to be a member of a very elite club called Dividend Kings. And with its dividend hike of 8% in May 2022, Medtronic inched closer to that club's doorway, marking 45 years of dividend increases.
Canny investors understand several implications of the situation, the first being that it would look terrible for the company to fail to cross the finish line now that it's so close. After all, what would you think if a business with a very long history of returning more capital to its shareholders suddenly went back on its implicit willingness to continue to do so forever?
Raising the dividend is a sign of financial strength, and it's likely that the stock would take a serious hit if management decided to pause hikes. But smart investors also recognize that the resources to continue hiking are starting to look a bit constrained.
Medtronic's payout ratio is 87%, so there is some headspace to keep raising the payment over the next five years, provided that earnings don't collapse. Take a look at this chart to see the problem:
MDT Dividend Per Share (Quarterly YoY Growth) data by YCharts
As you can see, over the last 10 years, its dividend per share is growing faster year over year than its quarterly net income. In the same period, its payout ratio has risen.
Unless earnings growth ramps up the pace or the pace of dividend hikes slows down, Medtronic might not become a Dividend King. Or if it does, it might come at the expense of less investment in growth, which wouldn't be great for shareholders in the long term.
