Stryker (SYK -0.48%) and Medtronic (MDT -0.21%) are a pair of the biggest and most important medical-device and supply companies out there, but they're a bit different in the stability of the dividend income they offer to investors. If you're cruising for a safe investment that will provide you with a growing payout over time, you need to know what you're getting into.
So on that note, let's look at which of these two companies is a safer dividend stock -- the answer might surprise you.
Image source: Getty Images.
The case for Stryker's dividend safety
Overall, Stryker's business is quite stable: It makes medical equipment, medical instruments, and surgical robotics for healthcare systems worldwide, and there isn't much in the way of rapidly shifting demand for its major segments. But it can reliably generate growth by investing in research and development (R&D) to make incremental improvements to its existing products, even if that growth is unlikely to be rapid due to the slow-growing nature of its markets.
For example, developing more-advanced hip replacement products for use with its surgical robot system probably won't make investors rich overnight, but it'll keep the top and bottom lines expanding.
Its financial performance tells much the same story of stability. While its forward dividend yield is only 1%, its payout ratio is 42%. That means it has plenty of room to hike its dividend, possibly even if its earnings take a big hit in a given year.
In short, its dividend is very sustainable, and a lot of things would need to go wrong for it to be at risk of being slashed. And because Stryker competes in so many different segments of the healthcare sector, the chance of multiple big problems happening at once is quite slim.
In fact, over the last three years through March, net income actually grew by 64%, reaching $2.6 billion, and management hasn't signaled that its fortunes are about to take any turn for the worse. Plus, its leaders struck an upbeat tone in its first-quarter earnings release, pointing to improving operating conditions for its supply chain after a year of pandemic-related pressure.
With little in the way of major headwinds in the works or red flags for investors, Stryker should be able to continue with its current strategy while paying out its dividend year after year.
Medtronic's dividend doesn't look nearly as solid
Like Stryker, Medtronic benefits from its entrenched position in the surgical technology and medical hardware markets, enabling it to capture growth and defend its market share over time. The difference is that it's having a hard time consistently growing, leading management to initiate a business transformation to increase its operational efficiency, especially in its supply chain and manufacturing.
Over the last three years, its earnings actually fell by 7.9% to reach just over $4 billion, but over the last 12 months, net income collapsed by 22%. With rising prices of inputs pressuring its earnings, costs associated with its new performance incentive plan, and macro factors like its rising tax rate, this slip aren't too surprising.
While Medtronic isn't going out of business, the financial impacts of its recent headwinds are undeniable, and it's unclear when conditions will improve. For some of those impediments -- like the decline in ventilator sales due to falling demand from hospitals as the coronavirus recedes -- there is unlikely to be a catalyst for a change that would benefit the company.
And that will likely translate into more ongoing pressure on earnings -- and eventually its dividend. While its forward yield is a decent 3%, its payout ratio is 87%, which is quite high. The company could potentially pay out more than it brings in from earnings in a slow quarter. Though there is little indication that the dividend will be cut anytime soon, it is possible that management will slow the rate of increases.
Over the last 10 years, Medtronic's dividend has increased at an annualized rate of 8.1% versus 10.2% for Stryker's dividend. Slowing it down much more could leave it at a crawl.
In the long term, people who invest in Stryker will probably see their dividend earnings grow faster than those who invest in Medtronic. At the same time, Medtronic's dividend is a lot closer to being halted or cut entirely than Stryker's even though it probably won't happen anytime soon. Therefore, Stryker is the safer dividend stock between these two, and it's probably the better buy for most other purposes as well.
