It's no secret to Intuitive Surgical (NASDAQ:ISRG) investors that the company is a cash cow. Free cash flow as exceeded $400 million annually since 2012, and it currently carries about $3.1 billion of cash, cash equivalents, and investments on its balance sheet. With these characteristics, could the maker of the robotic da Vinci become a dividend payer in the future?
Why a dividend could make sense
About two years ago, I explored whether Intuitive Surgical could afford to pay a dividend to investors, as well as whether it would make sense to do so. I concluded that the company could reasonably pay out about 30% of its 2013 earnings to investors. Today, this payout would represent about a 1% dividend yield.
Since 2013, Intuitive Surgical hasn't initiated a dividend. However, it did continue to spend aggressively on share repurchases. In 2013 and 2014, it repurchased $1.1 billion and $1 billion worth of common stock, respectively. With an average share price of around $450 during this period, which is about 17% lower than the share price at the time of this writing of about $540, this has arguably been an excellent use of excess cash.
But now with shares trading higher and with the stock's valuation already pricing in considerable earnings growth in the future, it's a great time to revisit whether a dividend could make sense. Indeed, even management appears dubious about spending liberally on repurchasing shares with the stock trading at these levels; during the trailing 12 months, management's spending on repurchases has amounted to just $100 million, despite an authorized $1 billion share repurchase program in February.
Furthermore, it's worth noting that Intuitive Surgical's cash position has swelled recently, making assessing the company's dividend potential even more interesting. Intuitive Surgical's cash, cash equivalents, and investments of $3.1 billion today is up significantly from a level of $2.5 billion at the end of 2014 and $2.8 billion at the of 2013.
If Intuitive Surgical did opt to initiate a dividend, how much could it pay out on a regular basis?
With annual free cash flow averaging around $600 million over the past six years, the company could easily pay out about half of this free cash flow on an annual basis, or $300 million. This would leave room for continued repurchases of up to about $300 million annually without tapping into the company's cash position.
A dividend payout at these levels would amount to a dividend yield of about 1.5%. This yield happens to be in line with other dividend-paying industry peers. Stryker, Zimmer Biomet, and Medtronic have dividend yields of 1.5%, 0.8%, and 2%, respectively.
Under the company's current circumstances, a dividend in the future looks both possible and likely. With Intuitive Surgical's excess cash rising recently, and given the company's history of consistently producing heady levels of free cash flow, initiating a dividend could be a shareholder-friendly move. Of course, it's impossible to know whether it will initiate the dividend in the near future. But it's a key item worth considering if investors who own the stock are hoping the company could eventually pay a dividend someday.