Updated on January 31st, 2023 by Nikolaos Sismanis
Investors looking for high-quality dividend growth stocks should focus, in part, on companies that maintain long histories of dividend increases. Steady dividend raises from year to year, regardless of the economic climate, is a sign of a company with durable competitive advantages and long-term growth potential.
With that in mind, every year, we review each of the Dividend Aristocrats, a group of 68 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
You can download your copy of the Dividend Aristocrats list, including important metrics like dividend yields and price-to-earnings ratios, by clicking on the link below:
The next Dividend Aristocrat in the series is healthcare giant Medtronic (MDT).
Medtronic has an impressive history of dividend growth. The company has increased its dividend for 45 years in a row. With an approximately 3.3% yield, Medtronic is not exactly a high-yield stock.
However, the stock’s yield is still higher than the average yield of the S&P 500.
And, Medtronic typically raises its dividend at a high rate each year, thanks to its strong earnings and leadership position within the medical devices industry.
According to the company, Medtronic has increased its dividend by 16% compounded annually over its 45 years of annual increases. These qualities make Medtronic an attractive dividend growth stock for long-term investors.
Medtronic was founded in 1949 as a medical equipment repair shop by Earl Bakken and his brother-in-law, Palmer Hermundslie. Today, Medtronic is one of the largest healthcare companies in the world. Medtronic is a large-cap stock with a market capitalization of ~$110 billion.
Medtronic PLC is the largest manufacturer of biomedical devices and implantable technologies in the world. Medtronic currently has four operating segments: Cardiovascular, Neuroscience, Medical Surgical, and Diabetes.
Source: Investor Presentation
On November 22nd, 2022, Medtronic reported Q2 fiscal year 2023 results for the period ending October 28th, 2022 (Medtronic’s fiscal year ends the Friday closest to April 30th). For the quarter, Medtronic reported sales of $7.6 billion, a 3% decline compared to the same quarter last year. Sales in the Cardiovascular, Medical Surgical, and Diabetes segments were down 1.9%, down 10%, and down 5.0%, respectively. Neuroscience grew 2.3%, nonetheless.
Adjusted net income equaled $1.73 billion or $1.30 per share, down 4% and 2% year-over-year, respectively.
Results were hurt by slow supply recovery and modest market procedure volumes in some businesses, and hence, Medtronic lowered its guidance for annual earnings-per-share from $5.53-$5.65 to $5.25-$5.30.
That said, Medtronic sees a glimmer of hope for its business with a projected comeback in the latter half of the year.
Medtronic is investing in growth, both organically via R&D and through acquisitions. The first catalyst for Medtronic is the aging population. There are ~70 million Baby Boomers in the U.S., those aged 51-69 years. Thousands of people are entering retirement every day. Combined with longer life expectancy and rising healthcare spending, the operating environment is very attractive for Medtronic.
The company has had many regulatory product approvals since 2019. The new products should drive growth, allowing the company to maintain or even gain market share.
Medtronic also has a major growth opportunity in new geographic markets. Specifically, Medtronic has a presence in several emerging markets, such as China, India, Africa, and more. These countries have large populations and high economic growth rates. Medtronic operates globally in more than 140 countries.
Medtronic’s emerging market revenue has consistently grown at a double-digit rate for many years. In the most recent quarter, emerging market constant-currency revenue increased by 4% despite China-related revenues falling by 9%. While the U.S. currently accounts for just over half of Medtronic’s revenue, emerging markets are growing faster.
Another growth catalyst for Medtronic is acquisitions. The largest single acquisition for Medtronic was its $50 billion acquisition of Covidien in 2015. The acquisition presented significant growth potential for Medtronic.
Medtronic is acquiring tuck-in acquisitions and has spent more than $3.3 billion on nine acquisitions since 2021. These companies include Acutus Medical, Medicrea, RIST, Avenu Medical, Companion Medical, Sonarmed, intersect ENT, AFFERA, and AI Biomed.
In addition, Medtronic has made 75+ minority investments for a total of $900 million. These investments will facilitate future tuck-in acquisitions.
Competitive Advantages & Recession Performance
The main competitive advantage for Medtronic is its research and development capabilities. The company spends heavily on R&D each year, which provides it with product innovation. Medtronic’s R&D investments over the past few years are as follows:
- FY 2018 R&D expense of $2.3 billion
- FY 2019 R&D expense of $2.3 billion
- FY 2020 R&D expense of $2.3 billion
- FY 2021 R&D expense of $2.5 billion
- FY 2022 R&D expense of $2.7 billion
The result of all this spending is that the company has a huge intellectual property portfolio with nearly 86,000 awarded patents. This fact has allowed Medtronic to build a strong product pipeline across each of its business segments.
In addition, Medtronic benefits tremendously from its global scale. The company operates in over 140 countries around the world. It has the operational flexibility to generate industry-leading profit margins, which helps fuel its growth.
Another competitive advantage for Medtronic is that it operates in a defensive industry. Consumers often cannot forego medical treatments, even when the economy is in recession.
Medtronic’s earnings-per-share during the Great Recession are as follows:
- 2007 earnings-per-share of $2.61
- 2008 earnings-per-share of $2.92 (12% increase)
- 2009 earnings-per-share of $3.22 (10% increase)
- 2010 earnings-per-share of $3.37 (5% increase)
Medtronic had the rare achievement of earnings growth each year during the recession. The company also showed remarkable strength during the pandemic. This demonstrates its recession-resistant business model. Medtronic should be able to continue growing its dividend each year in both economic recessions and expansions.
Valuation & Expected Returns
Based on the recent share price of ~$82.6 and expected earnings-per-share of $5.28 in fiscal 2023, Medtronic stock trades for a price-to-earnings ratio of 15.6. The stock’s current valuation is below that of the broader S&P 500 Index and modestly below its long-term average.
From 2013 through 2021, it had been typical to see Medtronic stock trade hands in the 15 to 20 times earnings range, even bumping up to 21+ times earnings a couple of times; this despite the idea that the firm has been exceptionally consistent through that entire period. Our expectation assumes a fair multiple of 17 times earnings.
As a result, Medtronic shares appear to be slightly undervalued today. If the stock valuation expands to our fair value estimate by 2028, the corresponding multiple expansion will boost shareholder returns by approximately 1.7% per year over this period.
We expect a 6% annual earnings growth for Medtronic through 2028, and the stock has a 3.3% dividend yield. There is plenty of room for continued dividend increases each year. With a dividend payout ratio of just over 50%, and a positive earnings growth outlook, Medtronic should continue its streak of annual dividend increases.
Total returns would consist of the following:
- 6.0% earnings growth rate
- 1.7% multiple expansion
- 3.3% dividend yield
Medtronic is expected to return 10.7% annually over the next five years. Medtronic’s prolonged decline in stock price since September 2021 has improved the stock’s potential annualized returns.
Medtronic has virtually all of the qualities dividend growth investors should look for. It possesses a highly profitable business, a leadership position in its core markets, and long-term growth potential. It also has multiple catalysts for future growth and the ability to keep growing its dividend even during recessions.
Medtronic has increased its dividend for more than four decades, including a strong 7.9% increase in 2022, which is highly impressive given the continued headwinds from a tough macroeconomic environment.
With Medtronic’s stock price near its 7-year lows, Medtronic appears to be offering a compelling investment opportunity for long-term dividend growth investors.
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Dividend Champions: Dividend stocks with 25+ years of dividend increases, including those that may not qualify as Dividend Aristocrats.
- The Dividend Achievers: dividend stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings: considered to be the ultimate dividend growth stocks, the Dividend Kings list is comprised of stocks with 50+ years of consecutive dividend increases
If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:
- The Complete List of Monthly Dividend Stocks: stocks that pay dividends each month, for 12 payments over the year.
- The Blue Chip Stocks List: this database contains stocks that qualify as either Dividend Achievers, Dividend Aristocrats, or Dividend Kings.