Imagine spending a lifetime building your investment portfolio only to worry about whether you will outlive the balance in your investment accounts.
If you are exclusively buying growth stocks with the intent of eventually selling them off for capital gains to sustain your lifestyle, running out of money could be a possibility. This is because a market downturn at the wrong time could effectively wipe out years of capital gains in just months.
But a dividend growth strategy -- with the right stocks -- could allow your money to grow rather than diminish over time. Consider medical device maker Medtronic (MDT -1.19%). Having just upped its quarterly dividend for the 46th straight year, it is on the cusp of becoming a Dividend King.
So should you buy Medtronic? Let's examine its fundamentals and valuation to get an answer.
A quarter of all-around healthy growth
Medtronic is a massive business that takes innovation seriously. In its latest fiscal year, the company spent $2.7 billion in research and development (R&D), or 8.6% of sales, to fund 200-plus clinical trials. Its devices are used to address over 70 different medical conditions like diabetes. Thanks to this broad product lineup, the Ireland-based medical device maker treats some 76 million patients each year.
This dedication to R&D is paying off. Net sales grew by 5.6% over the year-ago period to $8.5 billion in the fiscal fourth quarter, ended April 28. This was primarily driven by double-digit growth in its cardiovascular segment, which brought in $3.3 billion. And its neuroscience segment saw mid-single-digit growth, bringing in $2.4 billion. All of this more than offset slight revenue declines in the medical surgical and diabetes segments.
On a currency neutral basis, Medtronic's non-GAAP (adjusted) diluted earnings per share (EPS) grew by 9.2% to $1.66 during the fiscal fourth quarter. Disciplined cost management helped its operating margin expand by 50 basis points to 30.2%. Combined with a slight reduction in its diluted share count, this explains how Medtronic's adjusted diluted EPS growth outpaced net sales growth for the quarter.
As Medtronic continues to secure more regulatory approvals and launch new products, the company should deliver decent adjusted diluted EPS growth to shareholders in the years ahead. In fact, I believe that the analyst consensus of 1.8% annual earnings growth over the next five years could prove to be too conservative over time.
Image source: Getty Images.
Dividend growth can continue
Income investors will appreciate Medtronic's 3.4% dividend yield, which is more than twice the S&P 500 index's 1.6% yield. The cherry on top of the income sundae is that the company has also delivered strong dividend growth to its shareholders; the current quarterly dividend per share of $0.69 is up 146% over the past 10 years.
MDT Dividend data by YCharts.
And with Medtronic's dividend payout ratio slated to come in at a manageable 54% for the current fiscal year ending next April, future dividend growth should be in the cards as well.
The current valuation is a good deal
Shares of Medtronic have rallied 6% thus far in 2023. Yet, the stock still looks like a great value. Medtronic's forward price-to-earnings ratio of 14.8 is well below the medical devices industry's average of 25.4. This is why the stock is arguably a convincing buy for dividend growth investors at the current $83 share price.
