Medtronic (MDT +0.69%) is a large medical device maker, but its stock hasn't performed particularly well of late. After hitting a peak in 2021, the stock fell nearly 50% and has since moved roughly sideways. If you think in decades and not days, this is a long-term opportunity. Here are five reasons why.
1. Medtronic has a large and diversified business
With a market cap of around $110 billion, Medtronic is a giant company. It has leading industry positions in each of the various business lines in which it operates, which include cardiovascular products, neuroscience, medical surgery, and diabetes (more on this division below). Basically, the company has multiple levers for growth, and it is a strong competitor in each of the healthcare niches in which it competes.
Image source: Getty Images.
Notably, the business is global, which furthers the diversification story. But this is a benefit in a different way, too, since Medtronic can release products into foreign markets while still working to get approval for the U.S. market, which tends to take more time. When its medical devices do hit the U.S. market, however, they are often well understood and come in with built-up demand. All around, if you are looking for a medical devices stock, Medtronic covers a lot of bases.
2. Medtronic is an industry veteran
One of the complexities of the healthcare sector is the importance of research and development. Smaller companies often end up getting a huge amount of attention because of new and exciting medical breakthroughs being made. But small upstarts come with huge risks, too. If a product faces a setback, a small company could see its stock plunge. Often the stock price is the only factor at play, as young companies rarely pay a dividend. That's not the case with Medtronic, which is a mature business that pays a dividend.
The actual yield will be touched on below. The big story here is that Medtronic has increased its dividend annually for a huge 48 consecutive years. That's just two years shy of Dividend King status, which is an incredible feat for any company, let alone one that involves constantly improving technology.
MDT Dividend Per Share (Annual) data by YCharts.
3. Medtronic has a very attractive dividend yield
Medtronic has a long history of increasing its dividend, rewarding shareholders for sticking around. And, as noted, the stock price has fallen dramatically from its peak. Given the math behind dividend yields, that means the yield has gone up dramatically. Right now, Medtronic's dividend yield is 3.25%.
That's well above the 1.3% on offer from the S&P 500 index (^GSPC +1.20%), and well above the roughly 1.8% yield of the average healthcare stock. Medtronic's current yield also happens to be near the high side of its historical yield range. That suggests that this reliable dividend stock is historically cheap.
MDT Dividend Yield data by YCharts.
4. Medtronic looks attractively priced
Dividend yield is a less traditional valuation tool, so it pays to also examine more traditional valuation metrics when looking at the stock. Right now, Medtronic's price-to-sales, price-to-earnings, and price-to-book value ratios are all below their five-year averages.
Given the historically high yield and historically low valuation metrics, it looks like Medtronic is most definitely on sale today. To be fair, there's a reason for that. The company's growth has stalled out over the last few years. Given the company's size, it isn't shocking that it would be a slow and steady grower. And, given its long history in the medical device business, it isn't surprising that it would go through a difficult period.
Unfortunately, it also isn't unusual -- given the company's size and the industry in which it operates -- that it is taking some time to turn the ship around. But the best companies find ways to manage through the hard times, which brings up what may be the most important point.
NYSE: MDT
Key Data Points
5. Medtronic is working to get growth back on track
A company doesn't get to 48 annual dividend increases without having to work through some weak patches. Even the best companies face hardship at times. But they are the best companies because they take the rough stretch head-on and find ways to work through it. This is exactly what Medtronic has been doing.
For starters, the company has remained focused on research and development. Those efforts are starting to pay off as new products get introduced to the market. It has also been attempting to improve its profit margins by exiting less profitable business lines. The big one on that score is going to be the spin-off of the diabetes division.
Management believes this move will be immediately accretive to earnings because, despite growing quickly, diabetes has less attractive margins when compared to its other business lines. Basically, Medtronic is doing what it needs to do to get back on the growth track.
Well-run companies don't go on sale very often
Medtronic is an industry-leading company with a long history of rewarding investors well as it has grown. Sure, the company is facing some difficulties right now, but it's working through the issues one by one. This is what good companies do, even if Wall Street tends to focus on the short-term headwinds and not the long-term opportunities. If you can look past today's problems and see that well-run Medtronic is historically cheap, you'll probably want to add this reliable and high-yield dividend stock to your portfolio today.
