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Medtronic PLC (MDT): Double-Digit Dividend Growth for this Dividend Aristocrat

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Medtronic PLC (NYSE:MDT) hiked its dividend by 25% earlier this year and has now increased its dividend for nearly 40 consecutive years. While MDT’s 2.0% dividend yield isn’t enough for investors living off dividends in retirement, the stock’s double-digit annual total return potential is attractive in today’s market environment, and we expect continued double-digit dividend growth in each of the next several years.

MDT Dividend

Among the funds followed by Insider Monkey, 58 held shares of Medtronic at the end of September, amassing 2.20% of the company’s outstanding stock. However, the aggregate value of these funds’ holdings went down to $2.05 billion from $2.56 billion held by 63 funds a quarter earlier. Doug Silverman and Alexander Klabin’s Senator Investment Group disclosed holding 5.0 million shares in its latest 13F filing.

We like the diversity of MDT’s sales mix, the recession-resistant nature of its medical devices, and the company’s dominant positions in many of its key markets. With that said, we believe dividend growth investors need to have a positive view on MDT’s $50 billion acquisition of Covidien and future regulatory changes impacting the U.S. healthcare landscape before buying the stock. Let’s take a closer look.

Business Overview

MDT was founded in 1949 and manufactures a diversified portfolio of medical devices used by healthcare institutions and physicians.

The company acquired Covidien for roughly $50 billion in January 2015 to expand its presence in faster-growing emerging markets, bolster the size and scope of its portfolio of hospital supplies, and avoid some taxes by relocating its headquarters overseas. Prior to the acquisition, MDT was primarily known for its cardiac and coronary devices (e.g. defibrillators, pacemakers, valves, and heart stents), diabetes care, spinal fusion, and neural stimulation businesses. Covidien focused on hospital and medical supplies, equipment for surgeries (e.g. surgical staplers), and its vascular therapies.

The deal about doubled MDT’s revenue to $28 billion and should help it gain more leverage and prominence on hospitals’ supplier lists as they increasingly look to cut costs. Investors considering MDT should be sure they are confident in this deal because it will impact MDT (positively or negatively) for years to come.

Segments:

Through the first six months of its fiscal year 2015 (including Covidien), MDT’s sales mix by segment was: Cardiac Rhythm & Heart Failure 19%, Coronary & Structural Heart 11%, Aortic & Peripheral Vascular 6%, Surgical Solutions 18%, Patient Monitoring & Recovery 15%, Spine 10%, Neuromodulation 7%, Surgical Technologies 6%, Neurovascular 2%, and Diabetes Group 6%.

Essentially, the company’s medical device portfolio is extremely broad and diversified.

By geography, about 55% of MDT’s revenue is generated in the United States, 33% comes from other developed markets, and 12% is derived from emerging markets. Altogether, MDT’s products are used in more than 140 countries.

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