Medtronic (MDT 1.72%) is a stock I bought and have added to several times. I'm not a healthcare-focused investor, but the stock's historically high 3.6% dividend yield and long history of annual dividend increases were too much to ignore. Looking at the negative news around the stock largely centered around how new weight loss drugs might affect its sales, I think Medtronic is still a strong buy.
Medtronic is a diversified medical device maker
From a big-picture perspective, roughly-$100-billion-market-cap Medtronic is a giant in the medical device space. Its portfolio spans across multiple industry niches, including cardiovascular health, neuroscience, medical-surgical, and diabetes. The company is a notable player in all of the areas in which it competes.
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The company has been struggling for a couple of years. The biggest issues have been a combination of slow growth and difficulties in getting new products approved. But management isn't ignoring the headwinds -- the company is taking them on directly. For example, the company is in the process of jettisoning slower-growth businesses. That will either take the form of a spin-off, which is the current plan, or a sale, which is rumored to be in the works in the background. This move will allow the company's faster-growing opportunities to shine.
On the product front, there's less the company can do beyond what it has always done. That's because creating and producing new medical products is a process that just takes time, and unfortunately rarely goes smoothly. So the ups and downs that the company has experienced with new heart products, surgical robots, and diabetes offerings are really just normal issues. The problem is more that all of these products had been facing problems at the same time. Medtronic is slowly working through the issues and taking the steps necessary to succeed over the long term.
If that were all that was going on today, there's a good chance that the stock would be performing better. But even good news hasn't been enough to lift the stock price and bring the yield back down to more normal levels.
MDT Dividend Yield data by YCharts
Weight loss drugs are a new drag for Medtronic
One of the big stories on Wall Street today is the opportunity ahead for weight loss drugs. That may seem unrelated to medical devices, but it isn't. Being overweight is a huge cause of many of the health problems that Medtronic's devices look to solve, or at least help improve. So if the new weight loss drugs take off, there's a risk demand for Medtronic's products will suffer.
I'm not a scientist or a medical doctor, but I am a human being. And humans tend to follow certain habits and paths in life. Taking a regular injection just doesn't seem like something that a huge percentage of people are going to be able to do over a long period of time. Yes, losing weight is something that people want to do, but it has always been difficult to get patients to actually stick to their medication plans. I can only imagine that adding needles to the equation would make things even worse.
NYSE: MDT
Key Data Points
Then there are the normal eating patterns that are being disrupted. People like sweets, hard stop. These drugs are relatively new, with little real-world data to support the long-term impact they will have on eating habits. Given human history, it seems unlikely to me that people taking the new drugs will permanently stop eating things they like. And the things humans like to eat are very often bad for us.
The end story for me is that Medtronic is finally starting to turn a corner toward better business performance, but the improvement is being hidden by what is likely to be a temporary headwind. That suggests that buying Medtronic remains attractive given its historically high dividend yield and long history of annual dividend increases (46 years and counting).
Drugs can't solve all the problems
Perhaps weight loss drugs are the new miracle product that changes humanity for the better. But that's a trope I've heard before, with statins for example. My gut tells me that humans will be humans and that Medtronic's business is still well-positioned for long-term success even in the face of the new weight loss drug headwind. But given Wall Street's tendency to go to extremes, investors are currently extending the best possible outcome for the weight loss drugs, and the worst outcome for Medtronic, years into the future. I'm betting that Medtronic will be just fine, and I would have no problems buying even more of it if I could only buy one single stock.
