Thursday, September 3, 2015

Medtronic Inc. (MDT) Dividend Stock Analysis

Linked here is a detailed quantitative analysis of Medtronic Inc. (MDT). Below are some highlights from the above linked analysis:

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. Since MDT's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a slight premium to its calculated fair value of $71.32. 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 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. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. MDT earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1977 and has increased its dividend payments for 38 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

MDT earned a Star in this section for its NPV MMA Diff. of the $770. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as MDT has. If MDT grows its dividend at 9.7% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 2.92%. MDT earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.

Peers: The company's peer group includes: The Becton, Dickinson and Company (BDX) with a 1.6% yield, Baxter International Inc. (BAX) with a 1.2% yield and CR Bard Inc. (BCR) with a 0.5% yield.

Conclusion: MDT did not earn any Stars 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 four Stars. This quantitatively ranks MDT as a 4-Star Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $85.36 before MDP's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 38 years of consecutive dividend increases. At that price the stock would yield 1.8%.

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 8.3%. This dividend growth rate is above the 9.7% used in this analysis, thus providing a margin of safety. MDT has a risk rating of 1.00 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. The stock is trading above my calculated fair value of $71.32. 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,