If I’ve said it once, I’ve said it 100 times since I started putting together our Income Builder Portfolio: This is a long-term endeavor, not a trading vehicle.
And yet here I am, selecting a company for the IBP that we bought and sold in 2019.
Looks more “tradey” than “long-termy,” no?
Well, there is a method to my madness … not that I think adding (or should I say “re-adding”?) Medtronic (MDT) to the IBP is madness.
Later today, I will execute a purchase order on Daily Trade Alert’s behalf for about $1,000 worth of the world’s largest stand-alone medical-device maker.
When we divested our 12-share position on March 1, 2019, it wasn’t because I was down on the Ireland-based company. It was because I learned that our brokerage, Schwab, doesn’t let dividends get reinvested back into corporations with foreign headquarters.
Now, thanks in great part to Schwab Stock Slices — a product I wrote about in introducing my new, real-money Grand-Twins College Fund — I felt emboldened to bring back MDT.
I’ll explain a little more about that in a bit. First, let’s talk some more about our next (and former!) position.
MDT makes products that are essential to the well-being of patients worldwide, as well as to the hospitals and medical professionals who serve those patients — or, as Morningstar Investment Research Center analyst Debbie S. Wang put it:
Pairing Medtronic’s diversified product portfolio aimed at a wide range of chronic diseases with its expansive selection of products for acute care in hospitals has bolstered Medtronic’s position as a key partner for its hospital customers.
Medtronic has historically focused on innovation, designing and manufacturing devices to address cardiac care, neurological and spinal conditions, and diabetes. … It is often first to market with new products and has invested heavily in internal research and development efforts as well as acquiring emerging technologies.
However, in the post-reform healthcare world where there are higher hurdles for securing reimbursement for next-generation technology, Medtronic has slightly shifted its strategy to focus on partnering more closely with its hospital clients by offering greater breadth of products and services to help hospitals operate more efficiently.
By partnering more closely and integrating itself into more hospital operations, Medtronic is well positioned to take advantage of more business opportunities in the value-based reimbursement environment, in our view. In particular, Medtronic has been pioneering risk-based contracting around some of its cardiac and diabetes products, which we think is attractive to hospital clients and payers alike.
And this company knows how to grow earnings, as illustrated by the following FAST Graphs image:
The blue arrow and yellow-highlighted area shows how — despite recessions, wars and political upheaval — MDT grew earnings per share every single year for two decades.
The red markings indicate the expected EPS decline due to ramifications from COVID-19.
However, the purple markings show MDT’s anticipated post-pandemic recovery to earnings.
Because so many procedures not related to coronavirus have been delayed or canceled, it has hurt the bottom lines of all medical-device companies.
Medtronic’s sales were doing superbly through 2019 … but they are expected to decrease by about 5.5% in 2020.
Medtronic’s May 21 earnings report was for the fourth quarter of the company’s 2019 fiscal year, but actually covered the three-month period that ended April 24.
In other words, the pandemic already was wreaking havoc around the globe, with businesses shuttering operations, shelter-at-home orders in place, and all but medical emergencies going untreated.
Due to all of that, MDT failed to meet quarterly earnings estimates for the first time since 2011.
Despite that miss, as well as tempered forward guidance, Medtronic still can make a pretty impressive case for itself as being worthy of investor consideration. The following slides are from MDT’s presentation at Jeffries Annual Healthcare Conference on June 3.
Although things are gradually re-opening, COVID-19 is still harming economies around the world, including America’s. So investors probably need to be patient before expecting major return on investments in this industry (and many others).
While quite a few companies have cut or frozen their dividends during this pandemic, Medtronic on May 21 announced a 7.4% raise in its payout to shareholders.
It’s the 43rd consecutive year this Dividend Aristocrat has increased its distribution, and it lifts MDT’s forward yield to 2.5%.
That history, combined with low debt and ample free cash flow to cover the dividend, has led Simply Safe Dividends to give Medtronic its highest score of 99.
But what about the “dripping” mandated by our Business Plan?
Well, thanks to Schwab Stock Slices, there’s a backdoor way to do that now: We can invest as little as $5 commission-free in any company, so when MDT pays its dividend each quarter, I’ll just turn right around and buy a fraction of a share.
It’s not the exact automatic dividend reinvestment being used to build the IBP’s other 32 positions, but it will have the same effect.
I’ll go into more specifics about how that will work, and also will take a thorough look at Medtronic’s valuation, in the post-buy article due to be published on Wednesday, June 24.
What If We Never Sold MDT?
Had the Income Builder Portfolio held onto Medtronic, which closed Monday at $93.33, our 12-share position would be worth $1,119.96. It also would have generated $31.92 in dividends.
Given that we realized $1,088.60 from the sale, the total return since March 1, 2019, had we kept MDT would have been just under 6%.
Meanwhile, the 6 shares of Home Depot we purchased at $183.8121 apiece, plus fees for both the Medtronic sell and HD buy, brought the total cost of the MDT-to-HD switch to $1,112.78.
Thanks to dripping, that part of our Home Depot stake now has 6.2412 shares. So with the price at Monday’s close at $249.16, that portion of our HD position is worth $1,555.06 – a 40% total return.
Not only has HD performed about 7 times better than MDT during that nearly 16-month span, but Home Depot has crushed the S&P 500 Index, too.
The moves also have been great from an income standpoint, which matters in a Dividend Growth Investing portfolio whose first objective is to “build a reliable, growing income stream.”
We have received $51.51 in dividends from that part of our HD stake — 61% more than the $31.92 the IBP would have gotten from Medtronic over the same time frame.
Wrapping Things Up
When it comes to investing, I am a very reluctant seller.
Sure enough, of the 72 transactions I have executed since we launched the IBP in January 2018, only 4 have been sells.
The Medtronic divestment was the first of those 4, and that obviously turned out fabulously due to Home Depot’s spectacular performance.
As I said at the time, I didn’t drop MDT because I had lost faith in the company. Quite the contrary, I think it’s a fine business — one I’m glad to be bringing back.
This time, I expect Medtronic to hang around in the Income Builder Portfolio for a lot longer than 7 weeks.
As always, investors are strongly urged to conduct their own due diligence before buying or selling any stock.
— Mike NadelWe Just Bought These Stocks for the Income Builder Portfolio [Buy Alert!]
While there are many things to like about these fine companies, their dividend growth ranks high on the list.
Source: Dividends and Income