Buying industry-leading companies in industries with growth potential tends to produce delightful results for dividend investors. This is because such businesses can generate revenue and earnings growth, which can fuel rising dividend payments.
The medtech juggernaut Stryker (SYK -0.46%) has been a tremendous dividend grower over the years. But is the stock still a buy for investors searching for dividend growth? Let's scrutinize Stryker's fundamentals and current valuation to decide.
Product launches powered double-digit growth for Stryker
Sporting a $106 billion market capitalization, Stryker is the third-biggest medical devices company in the world. This is only behind the respective $188 billion and $113 billion market values of Abbott Laboratories and Medtronic.
Stryker's net sales rose by 11.2% year over year to nearly $5 billion during the second quarter ended June 30. Accounting for the 0.7% headwind that the company faced due to weakness in foreign currencies compared to the U.S. dollar, net sales would have grown by 11.9% for the quarter.
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Organic net sales growth rate (YOY) | 6.1% | 11.9% |
| Net margin | 19.1% | 19.5% |
Data source: Stryker. YOY = year over year.
Dedicating between 7% and 9% of its total sales to research and development, Stryker has consistently launched numerous products in recent months that could move the growth needle. For one, the company launched the Xpedition-powered stair chair used by first responders in April. Stryker also launched Citrefix Suture Anchor System for foot and ankle surgical procedures last December. Finally, the company launched the Monterey AL Interbody System last October, which is used for a type of spinal surgery called anterior lumbar interbody fusion.
Stryker's non-GAAP (adjusted) diluted earnings per share (EPS) surged 12.9% higher over the year-ago period to $2.54 in the second quarter. Tight cost controls helped keep growth in total operating expenses under control, increasing year over year by just 7.9%. This is how the company's net margin expanded during the quarter by 40 basis points. That led Stryker's adjusted diluted EPS to grow more rapidly than net sales for the quarter.
Analysts predict the company's adjusted diluted EPS will compound by 10% annually through the next five years. This is slightly greater than the medical devices industry average annual earnings growth forecast of 9.7%, which is a testament to the quality of Stryker as a business.
Image source: Getty Images.
Stryker's dividend isn't done growing yet
Considering the average 1.5% dividend yield of the S&P 500 index, Stryker's 1% yield flies under the radar of most dividend investors. But with the quarterly dividend per share having nearly tripled in the past 10 years, the stock arguably deserves the attention of dividend growth investors.
SYK Dividend data by YCharts
Looking out over the next decade, dividend growth could remain almost as strong: Besides its double-digit annual earnings growth prospects, Stryker's dividend payout ratio will likely register at less than 30% in 2023. That gives the company the flexibility to grow its dividend at least as fast as earnings, if not a bit faster than earnings in the years to come.
Stryker is a great business at a rational valuation
Soaring 34%, the share prices of Stryker have been on a tear over the last 12 months. This would make it seem as though the stock would no longer be a buy. However, Stryker's forward price-to-earnings (P/E) ratio of 25.2 is in line with the medical devices industry average forward P/E ratio of 24.9. Given the company's exceptional growth profile, this valuation is arguably fair. That could be why analysts have an average 12-month share price target of $320 for Stryker, which would be decent capital appreciation from the current $287 share price.
