Medtronic (MDT +0.87%) is a top healthcare company and a leading maker of medical devices. At a market cap of more than $100 billion, the business has soundly established itself in the industry. It has hundreds of products, it continues to innovate, its operations are profitable, and it pays and increases its dividend every year for decades.
While all that sounds great, the stock price itself is only up 37% in 10 years. During that same timeframe, the S&P 500 amassed returns of around 180%. That suggests Medtronic has been an awful investment. Is there something fundamentally wrong with the stock? Or are investors overlooking something with Medtronic, and could this make it an underrated investment today?
NYSE: MDT
Key Data Points
The company's growth rate has been improving
One issue that definitely affected Medtronic's operations was the pandemic which created supply chain problems. As a result, it hasn't been a smooth ride for investors in recent years.
But there are signs that the business is now going in the right direction. On May 23, Medtronic released its most recent year-end numbers. For the fiscal year ending April 26, the company's top line totaled $32.4 billion, up nearly 4%. On an organic basis, it was up by a little over 5%. That's an improvement from a year ago when the top line declined by more than 1% and the organic growth rate was just 2%. For the new fiscal year, the company is once again expecting its top line to grow organically at a rate between 4% and 5%, and it's expecting similar growth in its bottom line.
In the long run, there may continue to be strong growth ahead for Medtronic. According to estimates from analysts at Fortune Business Insights, the global medical device market is expected to grow at a compounded annual growth rate (CAGR) of 6.3% until 2032.
Medtronic raised its dividend again
While Medtronic may not be generating explosive growth, consistency is what investors have come to expect and value from this stock. And that consistency is also visible in its growing dividend. At 3.4%, the stock's forward dividend yield is more than double the S&P 500's average of 1.4%.
Plus, the healthcare company routinely increased its dividend payments over the years. In May, the company announced it would raise its dividend for a 47th consecutive year. Over the course of five years, Medtronic's dividend is up 30%, which averages out to a CAGR of 5.3%. That's not a bad rate of increase, especially given the challenges the company faced in recent years.
The dividend payout ratio is around 100% of earnings, so investors may be concerned about its safety. But in the past fiscal year, Medtronic's free cash flow rose by 14% to $5.2 billion, and it paid out a little less than $3.7 billion in dividends during the year, which suggests the payout is sustainable. With Medtronic working on further strengthening its free cash flow, there are probably more rate hikes in the future. Free cash flow can often be a better indicator of a dividend's safety than just accounting income, as it excludes noncash items such as depreciation and amortization.
Should you buy Medtronic's stock?
Medtronic has a good, diverse business that you can rely on for some long-term stability. As long as you temper your expectations for the stock, it could be a suitable option for your portfolio. The stock pays a high dividend, it's growing steadily, and its valuation isn't all that high -- Medtronic stock trades at 15 times its estimated future earnings.
It has underperformed the S&P 500 in recent years, due to a combination of the markets being red-hot of late and Medtronic facing quite a bit of adversity. But with the company moving in a better direction, that gap should shrink. And there's an outside chance for Medtronic to even outperform the index in the future.
