Intuitive Surgical (NASDAQ:ISRG) shares are down about 7% since the company reported worse-than-expected third-quarter results last week. Now trading at $372, the stock is down a whopping 35% from its high above $570 this year. As the company's growth prospects suddenly vanish, a new question makes sense more than ever: Could (and should) Intuitive Surgical pay a meaningful dividend?
In Intuitive Surgical's third-quarter earnings, there were more signs that the company's growth story may be ending. Particularly, system sales were down 32% from the year-ago quarter. This dragged on overall revenue, down 7% from the year-ago quarter. With growth opportunities dwindling, should Intuitive Surgical pay a dividend? Can it?
What are peers doing?
Unfortunately, we don't have any direct competitors to compare to since Intuitive Surgical is arguably in a league of its own. But Stryker (NYSE:SYK) and Medtronic (NYSE:MDT), who both currently pay dividends, relate in to key ways.
First, like Intuitive Surgical, they sell devices and products that have significant switching costs for surgeons and doctors. For Stryker, the strong switching costs are mostly due to the learning curves associated with the company's products. For Medtronic, switching costs are founded in the company's well-patented products and its nurtured physician relationships. Intuitive Surgical shares all of these characteristics, fortifying the company's economic moat and giving the company durability -- dividend-worthy durability.
Second, all three companies have significant gross profit margins, qualifying them as cash cows.
Today, investors can get a 1.5% and 2% dividend yield from Stryker and Medtronic, respectively -- small, but meaningful enough to help set somewhat of a floor to share prices (or at least reduce volatility). Both companies have a payout ratio of about 30%. If Intuitive Surgical followed suit and paid out 30% of earnings, investors would get a 1.5% dividend yield at today's price -- right on par with Stryker.
Is a 1.5% yield enough?
Though it's not enough for dividend investors to pile in, it's enough to likely sustain incrementally greater interest in the stock. The company's lack of competition and its durable business model combined with a small dividend make a solid case for a long-term holding at today's price. But without a dividend, the valuation is questionable.
What do you think? Should Intuitive Surgical pay a dividend?