Company Description: Stryker Corp. makes specialty surgical and medical products such as orthopedic implants, endoscopic items and hospital beds.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
SYK is trading at a discount to 1.), 2.) and 3.) above. The stock is trading at a 31.5% discount to its calculated fair value of $69.89. SYK earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
SYK earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. SYK earned a Star for having an acceptable score in at least two of the four Key Metrics measured.
Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2001-2004, 2002-2005, 2003-2006, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1992 and has increased its dividend payments for 18 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
SYK earned a Star in this section for its NPV MMA Diff. of the $5,313. This amount is in excess of the $1,700 target I look for in a stock that has increased dividends as long as SYK has. If SYK grows its dividend at 20.0% per year, it will take 6 years to equal a MMA yielding an estimated 20-year average rate of 3.6%.
Memberships and Peers: SYK is a member of the S&P 500 a member of the Broad Dividend Achievers™ Index. The company’s peer group includes: Smith & Nephew plc (SNN) with a 1.4&=% yield, Zimmer Holdings, Inc. (ZMH) with a 0.0% yield and ArthroCare Corporation (ARTC) with a 0.0% yield.
Conclusion: SYK earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks SYK as a 5-Star Very Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $74.04 before SYK's NPV MMA Differential decreased to the $1,700 minimum that I look for in a stock with 18 years of consecutive dividend increases. At that price the stock would yield 1.0%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,700 NPV MMA Differential, the calculated rate is 16.2%. This dividend growth rate is lower than the 20.0% used in this analysis, thus providing a margin of safety. SYK has a risk rating of 1.75 which classifies it as a Medium risk stock.
SYK operates in very competitive areas of the global medical device industry, with a focus in several orthopedic and medical equipment niches. These niches are characterized by rapid technological innovation and market share volatility. Demand for most of its orthopedic products has become less immune to economic cycles. However, SYK is enjoying a strong recovery in the med-surg market. With low debt and a low free cash flow payout, the company's dividend fundamentals are impeccable. It is currently trading well below my $69.89 fair value price, but given its low yield of 1.5%, I will pass on the stock at this time.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in SYK (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: [SYK] [SNN] [ZMH] [ARTC]