Dividend stocks underperformed the broader equities market in 2023, as these traditional safe-haven yield picks struggled to compete with standout returns for artificial intelligence (AI) growth stocks and multi-year highs in both interest rates and bond yields. While the Invesco QQQ Trust (QQQ) ended 2023 on a gain of 53.7%, the popular Schwab U.S. Dividend Equity ETF (SCHD) edged up less than 1% last year.
However, as the Fed gradually pivots toward a more accommodative interest rate policy in 2024, dividend-paying stocks should regain some of their appeal among investors seeking high-yield returns. Against this backdrop, here's a closer look at one attractively priced stock that's on track for Dividend King status in the years ahead.
About Medtronic
Founded in 1949, Medtronic (MDT) is a global medical device company with operational headquarters in Minneapolis. With operations in more than 150 countries, Medtronic develops, manufactures, and sells a wide range of medical devices and therapies. It currently commands a massive market cap of $109.54 billion.
Medtronic stock gained roughly 6% in 2023, underperforming the broader equities market.
However, MDT offers a dividend yield of 3.35%, which is more than double the healthcare sector median yield. Notably, Medtronic is also a member of the coveted “Dividend Aristocrats” club, which is comprised of S&P 500 Index ($SPX) components with 25 or more consecutive years of dividend growth.
In fact, at 46 years of consistent dividend increases, MDT is on pace to become a Dividend King (50 consecutive years of growth) before the end of this decade. With a payout ratio of 51.5%, Medtronic has plenty of headroom to continue boosting its quarterly shareholder payments.
Along with its robust dividend, Medtronic stock is reasonably valued right now. The shares are priced at 15x forward adjusted EPS and 3.4x forward sales, both of which represent a decent discount to sector median valuations.
Inside MDT's Earnings Performance
Over the past three years, Medtronic's top line has expanded at a compound annual growth rate (CAGR) of 4.62%, while diluted EPS has clocked a CAGR of 5.68%.
In the latest quarter, Medtronic reported stronger-than-forecast revenue of $7.98 billion, up 5.3% year-over-year, driven by revenue growth across all key segments. Particularly, the Medical-Surgical segment delivered the highest YoY growth of 7%.
EPS declined slightly from the previous year to $1.25, but still managed to surpass the consensus estimate of $1.18 - extending MDT's pattern of topping bottom-line estimates.
The company's liquidity position remained solid, with a cash balance of $1.3 billion and current debt obligations at similar levels. Moreover, for the six months ended Oct. 27, Medtronic generated net cash from operating activities and free cash flow of $1.5 billion and $721 million, respectively.
What's the Growth Forecast for Medtronic?
Broadly speaking, the medical device industry appears poised for significant growth. Medtronic's primary revenue driver is the cardiovascular devices market, which is expected to expand at a CAGR of 7.9% through 2032. Likewise, the medical-surgical devices market is predicted to grow at a CAGR of 9.4% till 2030, and the diabetes medical devices segment is anticipated to clock a CAGR of 9.8% by 2032.
Medtronic is also looking to expand its footprint in key growth areas such as AFib, robotics, and structural heart. At the Bank of America Global Healthcare Conference, CEO Geoff Martha stated, "We look at AFib as one of the secular growth markets where as the population ages, AFib’s are going to become more and more of a health need, public health need. And we believe the medical device solution for that ablation is becoming better and better and better, especially with [Pulse Field Ablation], and it is going to become more of a first-line therapy over the current standard-of-care, which is medical management. " To support its growth in this market, MDT acquired Affera, a company specializing in AFib treatment.
Moreover, in order to reduce costs and strengthen its global operations, Medtronic has made structural improvements to its supply chains under the leadership of ex-Walmart (WMT) supply chain head Greg Smith. Investments have been made in supplier consolidation, technology, and automation to enhance supply chain resilience. Further, with the company's focus on reducing the number of suppliers and optimizing contracts, Medtronic is reaping the benefits of better pricing and increased cost savings.
Analysts Call MDT a ‘Buy’
Wall Street seems optimistic about the stock's prospects, with an average rating of “Moderate Buy” and a mean target price of $91.95 from the 25 analysts in coverage. This indicates expected upside potential of roughly 10.2% from current levels.
In total, Medtronic stock has 10 “Strong Buy” ratings, 1 “Moderate Buy” rating, 13 “Hold” ratings, and 1 “Strong Sell” rating.
