Company Description: Medtronic Inc. is a global medical device manufacturer with leadership positions in the pacemaker, defibrillator, orthopedic, diabetes management and other medical markets.
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
MDT is trading at a premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 47.4% premium to its calculated fair value of $53.47. MDT did not earn any Stars in this section.
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%
MDT earned two Stars in this section for 1.) and 2.) 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. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1977 and has increased its dividend payments for 37 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
The NPV MMA Diff. of the $218 is below the $500 target I look for in a stock that has increased dividends as long as MDT has. If MDT grows its dividend at 7.8% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 2.47%.
Memberships and Peers: MDT is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: The Becton, Dickinson and Company (BDX) with a 1.7% yield, Baxter International Inc. (BAX) with a 3.0% yield and CR Bard Inc. (BCR) with a 0.5% yield.
Conclusion: MDT did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks MDT as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $61.59 before MDP's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 37 years of consecutive dividend increases. At that price the stock would yield 2.0%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 10.1%. This dividend growth rate is above the 7.8% used in this analysis, thus providing no margin of safety. MDT has a risk rating of 1.50 which classifies it as a Low risk stock.
The company owns a diversified portfolio with a focus on developing products for a wide range of chronic diseases. Although it is exposed to the highly competitive areas of the medical equipment markets, MDT enjoys many competitive advantages including scale (operations and sales), product breadth and financial strength.
On February 17th the company announced fiscal third-quarter 2015 financial results, including adjusted earnings per share of $1.01, up 10.9% from the prior year's quarter. Omar Ishrak, Medtronic plc chairman and chief executive officer stated, "Q3 was a strong quarter, with revenue growth well above our outlook range for the fiscal year and exceeding our mid-single digit baseline goal. All three legacy Medtronic groups contributed to our robust performance." MDT completed its acquisition of Covidien at the beginning of it fiscal fourth quarter and begun integration of the new two companies.
The company continues to focus on increasing its presence is emerging markets like China and Latin America. The stock is trading above my calculated fair value of $53.47. However, its low yield is what's preventing me from giving it serious consideration 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 MDT (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: MDP, BDX, BAX, BCR,
