A global medical powerhouse
A long dividend history, buybacks, and improving earnings make this stock a buy.
By Marc Johnson, The Investment Reporter
Since we published our December 7, 2012 issue, Medtronic (MDT) shares have risen by 9.1%. In the nine months to January 25, the medical technology company reported higher adjusted earnings. But lower cash flow fails to confirm these higher earnings. The company expects to earn more in fiscal 2013.
Medtronic calls itself "the world's leading medical technology company -- alleviating pain, restoring health, and extending life for people with chronic disease." An aging and wealthier world population gives it growing markets. This should raise the medical device company's profits and let it retain its status as a 'dividend aristocrat.'
In the first nine months, Medtronic earned $2.731 billion, or $2.65 a share. This was up by 7.3% from $2.630 billion, or $2.47 a share, a year earlier. These results excluded one-time net litigation charges, acquisition-related items, the divestiture of items related to the physio-control division, and the impact of certain financing charges.
Medtronic's earnings per share rose more than total earnings. That's because it bought back 41.9 million of its own shares over the previous year. Medtronic's two broad segments generated higher reported revenue. The cardiac & vascular segment generated revenue of $6.352 billion. That was up by less than two percent, led by the coronary division. The restorative therapies segment generated revenue of $5.778 billion. That was up by more than 2.1%, led by the Surgical Technologies and Diabetes divisions.
Medtronic's international revenue grew to $5.721 or 46% of total revenue of $12.408 billion. This was led by emerging markets. The company writes that third-quarter emerging market revenue "grew 21% on a constant currency basis; 20% as reported." U.S. revenue grew to $6.687 billion. As a share of total revenue, the U.S. declined marginally to 54%. In fiscal 2013 (it ends in April), Medtronic expects its revenue to rise by 3%-4%, on a constant currency basis (as if exchange rates had remained the same).
Medtronic's regular costs went up by only 0.6%. But its income tax rate climbed by 3.7%, to 19.3%. The company's cash flow slipped by 1.3%, to $3.302 billion. This fails to confirm the higher adjusted earnings. Then again, it easily exceeded capital spending of $356 million complemented by acquisitions of $820 million and dividend payments of $797 million. Of excess cash flow of $1.349 billion, the company spent a net $1.089 billion buying back its shares.
We expect Medtronic to continue to raise your dividend every year -- as it has done for 36 years in a row. It should retain its status as a 'dividend aristocrat.' We also expect Medtronic to keep buying back its shares. This will raise the earnings per share and assist you in earning capital gains.
Medtronic expects to earn $3.66 to $3.70 a share in fiscal 2013 from its global operations. It remains a buy for gains and rising dividends.
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