Income investors seek a steady stream of dividends. Medtronic’s dividend history is long and it might make a great addition to an income portfolio. Let’s take a look at the business, dividend history, and payout safety going forward.
Business Overview and Highlights
Medtronic (NYSE: MDT) is a $130 billion business, and the world’s largest medical device company. The company is based out of Ireland and it employs 86,000 people. Last year Medtronic pulled in $31 billion in sales and that works out to $348,000 per employee.
The company runs within the consumer sector and maintains a solid credit rating (A) from the S&P. This allows Medtronic to issue cheap debt to grow the business and finance other initiatives.
On June 21, 2019, Medtronic’s board of directors approved an 8% increase to its quarterly cash dividend, raising the dividend from $0.50 to $0.54 per share. The new dividend will be paid on July 25 to shareholders of record at the close of business on July 8.
10-Year Dividend History
The company paid investors $0.82 per share a decade ago. Over the last 10 years, the dividend has climbed to $2.00. That’s a 144% increase and you can see the annual changes below…
The compound annual growth is 9.3% over 10 years… but over the last year, the dividend climbed 8.7%. The slowdown in dividend growth isn’t a great sign. Although, Medtronic still might be a good income investment. Let’s take a look at the yield…
Current Yield vs. 10-Year Average
Medtronic’s long history of paying dividends makes it one of the best dividend stocks around. This also makes the dividend yield a great indicator of value. A higher yield is generally better for buyers. Sustainability is also vital and we’ll look at that soon.
The dividend yield comes in at 2.23% and that’s below the 10-year average of 2.43%. The chart below shows the dividend yield over the last 10 years…
The lower yield shows that investors have bid up the company’s market value. They might be expecting higher growth and payouts. But more often than not, the dividend yield is mean reverting with share price changes.
Improved Dividend Safety Check
Many investors look at the payout ratio to determine dividend safety. They look at the dividend per share divided by the net income per share. So, a payout ratio of 60% would mean that every $1 Medtronic earns, it pays investors $0.60.
The payout ratio is a good indicator of dividend safety… but accountants manipulate net income. They adjust for goodwill and other non-cash items. A better metric is free cash flow.
Here’s Medtronic’s payout ratio based on free cash flow over the last 10 years…
The ratio is volatile over the last 10 years and the trend is up. In 2018 Medtronic’s free cash flow diminished which increased the payout ratio. But this year shows a payout ratio of 45.9%. This gives wiggle room for Medtronic’s board of directors to raise the dividend.
If you’re interested in seeing more dividend research, please comment below. You can also check out our free DRIP calculator. With it, you can uncover the power of dividend reinvestment growth.
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Good investing,
Robert
