We Just Bought Medtronic (MDT) for DTA’s Income Builder Portfolio

When I googled “most beautiful art in the world,” a collage of famous works popped up on my computer screen.

Though I’m no expert on the subject, I certainly can see why art connoisseurs would find those pieces to be lovely.

Still, Dividend Growth Investing connoisseurs like me are even more likely to be moved to tears of joy by a different kind of classic:

That gorgeous work depicts the epic rise and fall of … wait … what am I saying? There’s no fall at all, only rise.

It’s a chart showing how Medtronic (MDT) has grown its annual dividend over the past four decades. And yes, it’s a beauty!

I added that piece to the Income Builder Portfolio’s gallery on Tuesday, June 23, when I executed a purchase order on Daily Trade Alert’s behalf for 11 shares of MDT at $94 apiece.

There are plenty of reasons for investors to consider owning stock in the world’s largest stand-alone medical-device company, and I wrote about several of them in my previous article.

The reliable, predictable, growing dividend is at or near the top of the list for those looking to enhance their portfolio’s income stream.

Simply Safe Dividends gives MDT its highest safety score of 99, citing outstanding fundamentals such as low debt and more than enough free cash flow to cover the dividend.

Simply Safe Dividends

McLean Capital Research

Medtronic, which has a 2.5% yield, just last month announced a 7.4% raise. With our investment coming before the June 25 ex-dividend date, we will receive the new .58/share quarterly payment on July 17.

Because MDT is based in Ireland, our brokerage, Schwab, will not reinvest the dividend. In the past, that was a dealbreaker for us, as we bought but quickly sold the company last year when we discovered that annoying quirk unique to Schwab.

Thankfully, the brokerage has a new product called Schwab Stock Slices, which allows investors to make commission-free purchases of share fractions for as little as $5.

I am using Slices to build my Grand-Twins College Fund (a new, real-money, growth-and-income portfolio here on DTA), and I also will use it to do a form of self-directed dividend reinvestment with Medtronic.

After I receive the $6.38 payout (11 shares times .58) in a few weeks, I will immediately buy $6 worth of MDT. At the current price, that would add about .064 of a share to our total.

Then, 3 months later, I will repeat the process.

It’s not quite as convenient as the automatic “drip” we use for the IBP’s other 32 positions, but it’s a way to help our portfolio continue to live up to its mission and its name.

Sector Factor

Medtronic is our 5th holding in the Healthcare sector, joining AbbVie (ABBV), Amgen (AMGN), Johnson & Johnson (JNJ) and UnitedHealth Group (UNH).

Healthcare stocks now make up 17% of the IBP; only Information Technology has bigger representation in the portfolio.

I think it’s pretty important to have a solid stake in this sector; as a species, humans are getting older, fatter and sicker.

Healthcare also is considered a defensive sector because there is a constant demand for its products — resulting in consistent corporate earnings and reliable dividends in good times and bad.

If your doctor says you need one of Medtronic’s stents for your heart, you are going to get it. You aren’t going to worry about whether it’s the right time in the business cycle to do so.

Analyze This!

Many analysts are bullish on MDT. For example, 19 of the 26 market-watchers surveyed by  Thomson Reuters consider the stock to be either a Buy or Strong Buy.

Analysts from Argus, Credit Suisse and CFRA have a 12-month target price of between $115 and $121 for Medtronic. That’s 22% to 29% higher than what we paid for each share.

When we bought MDT the first time, back in January 2019, the same CFRA analyst — Kevin Huang — had a $104 target price.

He ended up being right, with the price eventually reaching $122, but Medtronic plummeted to $72 three months ago during the market’s coronavirus crash.

I won’t hold that “black swan event” against Huang, however, and I’m curious to see if MDT will get back up to $121 as he predicts.

Citing advances in Medtronic’s diabetes and cardiac product lines, Value Line has included the company in its portfolio of Stocks With Above-Average Year-Ahead Price Potential.

Value Line, which also gives MDT its highest Safety and Financial Strength scores, envisions 15% price appreciation over the next 18 months (yellow highlight on the image below) and as much as 70% long-term (red circle).

Valuation Station

With the global COVID-19 pandemic continuing to adversely affect most businesses, it’s more difficult than ever to determine accurate valuations on companies.

Morningstar is maintaining its $118 fair value estimate for Medtronic, making it look pretty attractive here.

“After making adjustments to our assumptions for tempered results in fiscal 2021, we’re holding steady on our fair value estimate,” Morningstar analyst Debbie S. Wang said. “Despite the pandemic-driven disruption to normal business, we’ve seen little to suggest that Medtronic’s wide moat — based on intangible assets — is at risk.”

A quick look at FAST Graphs makes MDT look a bit overvalued, as the “blended P/E ratio” of 21 is higher than its recent-years norm of 17.

However, if one really believes earnings will shoot back up in the not-too-distant future (purple circle and arrow), that P/E ratio might be viewed as a bit misleading.

One thing we know for sure: Medtronic isn’t crazy expensive as it was 20 years ago. Those who bought it at the end of 2000, when its P/E ratio was 60, experienced no growth until well into 2014. Yikes!

FAST Graphs

Wrapping Things Up

Total return matters, and I like to think Medtronic will do well in that realm. Unfortunately, it’s hard to predict a stock’s price with much certainty, even when a global pandemic isn’t going on.

Medtronic’s dividend? That’s a whole ‘nother story.

Ever since Jimmy Carter was crackin’ open peanuts in the White House, MDT has been giving shareholders annual dividend increases … and there is every reason to believe that streak will continue for as long as the Income Builder Portfolio exists (and then some).

That last sentence might not be the written version of a Monet or Rembrandt, but it’s darn beautiful to me.

— Mike Nadel

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While there are many things to like about these fine companies, their dividend growth ranks high on the list.

Source: Dividends and Income