Medtronic is the second-largest maker of medical devices (No. 1 is JNJ – read more). In 2015 company merged with Covidien (cash and stock transaction valued at $49.9B). Technically it was an inverse merger and shares of Medtronic will be exchanged for shares in Medtronic PLC (merged company). This means that shareholders will have to pay tax on capital gains (obviously if I understand correctly, see disclaimers). Anyway, coming back to analysis of company:

After a deal company presents following segments:

  • Cardiac & Vascular (35% sales)
  • Minimally Intensive Therapies (34% sales)
  • Restorative Therapies (25% sales)
  • Diabets (6% sales)

These segments are further dividend on different business units and products lines.

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Geographically: US 55%, Non-US Developed (Europe, Australia, Japan) – 33%, Emerging Markets 12%

Baseline financial goals:

  • Deliver consistent mid-single digit revenue growth
  • Constantly grow EPS 200 to 400 basis points faster than revenue
  • Return 50% of free cash flow (operating cash flow minus CAPEX) to shareholders

 

As it comes to financials (estimates):

Market cap ~ $110B

Net debt ~$19B

Payout ratio ~35%

ROE ~6.5%

Beta = 1.1

Dividend yield 2% (I see higher dividend potential after a deal, low payout ratio)

 

Estimated valuation ratios:

P/E = 17.7

EV/EBITDA = 13.3

 

Medtronic is one of The Dividend Aristocrats – paying from 1978. Currently share price is about all-time high ($77) and dividend yield is around 2%. For last 6 years company was paying about 2-3% yield so current level is neutral for me. Historically company was paying around 1%. For the last 5 years dividend growth rate is around 8% – decent result.

 

Drawdown risk:

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Share price of Medtronic is about its’ all-time high levels. Historically every few years there was a time with drawdown of around 40% – I think I will wait for such occasion even if it takes few years. I want to minimize risk/return ratio by buying good, high quality shares at selloffs. It means my entry point should be around $50.

 

Summing up, although deal structure was unfavorable for shareholders share price is around all-time high. Valuation demanding, dividend low, but on the other hand strong market position, good growth prospects, potential increase in dividend payout ratio. I think that during a (big) sell-off I will buy some shares. For $75 – not interested.

 

Disclaimer MDT – no position