For seasoned healthcare investors, Medtronic (MDT 0.62%) needs no introduction. The medical device specialist has been around for decades, successfully navigating one of the most highly regulated industries while generally delivering solid financial results and stock market performance. However, it hasn't been smooth sailing for Medtronic since 2019.
The company has encountered serious issues, causing the stock to perform, shall we say, not so well. Let's see how much a $10,000 investment in Medtronic five years ago would be worth today and whether the company can do better in the next half-decade and beyond.
A barrage of challenges
Medtronic's revenue partly depends on the volume of medical procedures performed with its devices. Physicians order more as needed. If a global pandemic sends the number of surgeries in the wrong direction for Medtronic's purposes, the company's sales will suffer.
That's what happened for much of 2020 and 2021, although Medtronic kept its revenue somewhat afloat thanks to the sale of mechanical ventilators that were crucial in helping many patients survive COVID-19.
MDT Revenue (Annual) data by YCharts
The aftermath of the first year of the pandemic was an economy marked by inflation, supply chain issues, labor market problems, and more. Medtronic had to deal with rising expenses as a result.
However, it's worth noting that even before the coronavirus outbreak and its aftermath, Medtronic had been dealing with relatively slow revenue growth. So, while the pandemic exacerbated things, some of its problems were alive and well five years ago, before anyone had heard of COVID-19.
Medtronic stock has provided a compound annual growth rate (CAGR) of 0.85% over the past five years, which yields an ending balance for a $10,000 investment of $10,430. The S&P 500's CAGR of nearly 15% in the past five years would have turned an initial investment of $10,000 into $19,880. To say that the stock has been an underperformer would be an understatement.
MDT Total Return Level data by YCharts
Mind your investing style
Can Medtronic turn things around? Here's one solid argument in favor of the company: It is one of the largest medical device companies in the world, with an extensive presence in more than 150 countries. It also has dozens of products and an established brand that physicians trust. So the company has proved over the years that its devices are effective.
All of this matters since the world's aging population will lead to increased healthcare needs and growing demand for precisely the kinds of products Medtronic manufactures.
But that only means the company will likely survive for a long time: Can it deliver better returns?
That will partly depend on its ability to generate stronger revenue and earnings growth. Management has been working on this project for some time and plans to double down on high-growth areas while spending less research-and-development funds on other projects. Medtronic decided it would separate its patient-monitoring and respiratory-intervention segment back in 2022, a transaction that is ongoing.
The company is also making a push into diabetes care, where there is a massive need. The condition now affects more than a half-billion adults worldwide, most of whom live in low- or middle-income countries.
There are important devices that help diabetes patients handle this chronic disease, but they are primarily available in developed countries. Medtronic's extensive global presence could allow it to tap into the underserved diabetes market in the rest of the world.
In the third quarter of its fiscal 2024, ending on Jan. 26, Medtronic's diabetes-care revenue increased by 12.3% to $640 million, partly thanks to the launch of its innovative insulin pump, the MiniMed 780G, last year in the U.S. By contrast, total revenue increased by just 4.7% to $8.1 billion.
Beyond diabetes care, Medtronic is making a push in the promising robotic-assisted surgery market, another industry with high growth potential.
Lastly, it's important to highlight its dividend record. The company is on its 46th consecutive year of payout increases and closing in on Dividend King status. Its dividend yield currently tops 3.27%, compared to the S&P 500's 1.47%.
Medtronic's dividend shouldn't be in trouble, even with its recent issues. The stock is a top pick for income seekers, patient investors willing to wait for a comeback, and those looking at the next decade and beyond. But Medtronic probably isn't a good option for investors looking for explosive growth-oriented companies.
