Dividend Analysis
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. MDT’s long-term dividend and fundamental data charts can all be seen by clicking here. With that said, it’s important to note that MDT’s historical results prior to this year do not include its $50 billion Covidien acquisition and should be interpreted accordingly.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Medtronic PLC (NYSE:MDT) has one of the safest dividends investors can find, recording an excellent dividend Safety Score of 83. The dividend’s safety appears to be very high because of the company’s low payout ratios, consistent free cash flow generation, reasonable balance sheet, recession-resistant products, and strong commitment to the dividend.
Over the last 12 months, MDT’s dividend has consumed 33% of the company’s free cash flow, leaving plenty of room for the company to continue paying and growing the dividend regardless of near-term business trends.
Looking at longer-term trends in payout ratios can also be helpful to see if growth in earnings per share has kept up with dividend growth. As seen below, MDT has consistently paid out about 20-30% of its free cash flow, which is a sign that the company is a reliable cash flow generator with plenty of sustainable dividend growth ahead.
Source: Simply Safe Dividends
Source: Simply Safe Dividends
For dividend companies with enough operating history, it’s always a prudent exercise to observe how their businesses performed during the financial crisis. During the recession, MDT’s sales and free cash flow grew each year, a remarkable performance. Many of the company’s medical devices are needed regardless of how the economy is performing, although pricing pressure can intensify.
Source: Simply Safe Dividends
High quality companies are able to generate free cash flow year in and year out. Rising cash flow is important because it supports continued dividend growth without expanding the payout ratio. As seen below, MDT’s high quality business model has enabled it to generate and grow free cash flow per share over the last decade.
Source: Simply Safe Dividends
While payout ratios, margins, industry cyclicality, free cash flow generation, and business performance during recessionary conditions help give us a better sense of a dividend’s safety, the balance sheet is an extremely important indicator as well.
