The primary objective of dividend growth investing is to build an investment portfolio that can provide an investor with reliable and growing streams of passive income. The dividends can be used however the investor would like -- paying bills, saving in the bank, or reinvesting in more shares.
Medical devices maker Stryker (SYK +3.93%) is an excellent dividend growth stock. This is evidenced by the fact that its dividend, payable on July 31, will be 7.9% higher compared to the previous year. But is the stock a buy for dividend growth investors?
Let's analyze Stryker's fundamentals and valuation to get an answer.
NYSE: SYK
Key Data Points
Forging a path to sales and earnings growth
Founded by Dr. Homer Stryker in 1941 after he discovered that existing medical products weren't producing satisfactory patient outcomes, Stryker has established itself as a leading medical devices company. Today, the company's products -- from trauma implants to operating tables, high-definition cameras, robotics systems, and more -- impact 130 million patients annually around the world.
| Metric | Q1 2022 | Q1 2023 |
|---|---|---|
| Organic Net Sales Growth Rate (YOY) | 9.2% | 13.6% |
| Net Margin | 17.6% | 17.2% |
Data source: Stryker. YOY = year over year.
In the first quarter, ended March 31, Stryker's net sales rose by 11.8% over the year-ago period to $4.8 billion. What was behind the company's healthy top-line growth rate?
Stryker's steadfast commitment to research and development continued to drive growth for the company. Late last year, the company launched its System 9 surgical power tools in the U.S. The company says the product is getting great customer feedback as it relates to ergonomics and quality. In the middle of the first quarter, Stryker also released its Neptune S waste management system, which fosters a safe environment for both the patient and healthcare professionals in the operating room.
These product launches are just the tip of the iceberg for the company's product launches in recent months. That explains how Stryker's constant-currency net sales compounded at 14% during the first quarter. The company also derived a 0.4% benefit to its net sales from bolt-on acquisitions for the quarter. These net sales gains were only partially offset by a 2.2% negative impact stemming from unfavorable foreign currency translation, which resulted from a robust U.S. dollar.
Stryker reported $2.14 in non-GAAP (adjusted) diluted earnings per share (EPS) in the first quarter, up 8.6% from the year-ago period. As the company's cost of sales became a greater percentage of its net sales, this caused its non-GAAP net margin to contract by 40 basis points. Along with a slight increase in its diluted share count, that is why adjusted diluted EPS climbed at a slower rate than net sales for the quarter.
As Stryker launches more products, the future should be just as encouraging. Analysts think that the company's adjusted diluted EPS will rise by 9.1% annually over the next five years -- about as fast as the industry's average growth prediction of 9.4%.
Image source: Getty Images.
A track record of massive payout growth
In comparison to the S&P 500 index's 1.5% dividend yield, Stryker's 1% yield isn't exactly setting the world on fire. But with its quarterly dividend per share having grown almost 20-fold this century (the dip in the late 2000s was only because the company switched to a quarterly dividend in 2009), sacrificing current income for future income could be a worthwhile proposition for dividend growth investors.
SYK Dividend data by YCharts.
This is especially the case when considering that Stryker's dividend payout ratio is going to clock in below 30% for this year. That leaves the company with the capital necessary to complete acquisitions and repay debt to improve upon its growth prospects and financial health. For this reason, I anticipate that the dividend will continue to grow at a high single-digit to low double-digit clip annually in the years ahead.
The valuation multiple is fair
Shares of Stryker are on fire so far in 2023, up 22% to date. But the stock's valuation arguably remains within reason. Stryker's forward price-to-earnings ratio of 26.3 is less than the medical devices industry average of 27.4. This is precisely why the stock looks to be a buy for dividend growth investors at the current share price.
