Medical device manufacturer Medtronic (NYSE: MDT) is a healthcare industry stalwart. The company, based in the U.S. and Ireland, is one of the largest in its segment, developing and selling a diverse portfolio of products that includes hospital equipment and devices for cardiovascular care and diabetes.
Sustained success has enabled it to reward shareholders with regularly growing dividends. After 47 consecutive years of payout hikes, it's approaching Dividend King status.
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Over the past half-century, with dividends reinvested, Medtronic has delivered a total return of almost 60,000% -- a near 600-bagger -- but today, it's trading more than 20% below the all-time high it hit in September 2021. Is the stock a buy now?
About half of Medtronic's revenue comes from the United States, the world's most lucrative healthcare market. The rest comes from international sales, where it's exposed to emerging markets that could grow faster over the coming decades. For example, international sales rose 7% year over year last quarter compared to 3.3% for U.S. sales. Product-wise, Medtronic's cardiovascular, neuroscience, and surgical segments comprise most of the business, with a minor contribution from its diabetes unit.
That diversity helps ensure stability. When countless medical procedures were delayed or canceled during the first few years of the pandemic, it was the first time Medtronic's trailing 12-month sales dropped by 10% since the mid-1980s. However, there's a trade-off between growth and stability: The company isn't going to wow investors with growth. Analysts estimate its earnings will grow at an annualized rate of only 6.5% over the next three to five years.
That would be enough to foster continued dividend growth and modest share price appreciation. Still, those looking for "get rich quick" stocks should probably look elsewhere.
Dividend stocks generally will not make you wealthy overnight. Investing in them is a slow process, like making good barbecue.
No, Medtronic isn't a hypergrowth stock. However, it is a mature, proven winner with steadily growing profits and a reliable dividend. If you're patient, that can be a potent formula.
At the current share price, Medtronic's dividend yields just over 3%. Combine that with 6% to 7% earnings growth, and investors could average 9% to 10% annual returns. Again, it's not extraordinary, but you can depend on Medtronic to perform better than most stocks. That safety has value, too. If you want to maximize your investment results, consider reinvesting your dividends.
When you use your dividends to automatically buy more shares of stock, you unlock greater compounding effects that can help you generate meaningful wealth over the long haul.
Investors should avoid overpaying for dividend stocks. It can take a long time for their underlying businesses to grow by enough to offset an excessive valuation.
Medtronic has arguably been overlooked in a market where the focus has been on technology stocks. Its shares trade at a price-to-earnings ratio of 15.8. Its price/earnings-to-growth PEG ratio of 2.4 is a touch high, but I'm generally willing to buy high-quality stocks with PEG ratios between 2.0 and 2.5. The lower the PEG ratio, the better the value, because you're getting more (expected) earnings growth for less. Blue chip dividend stocks often command higher valuations than their growth might appear to warrant because they have a reputation for dependability. Plus, earnings estimates are just educated guesses.
Medtronic's stock is probably not a jaw-dropping bargain at these prices, but it's an excellent business at a reasonable value. It's safe to call Medtronic a solid buy, especially if you're a long-term investor who intends to hold the stock and reinvest the dividends.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends Medtronic and recommends the following options: long January 2026 $75 calls on Medtronic and short January 2026 $85 calls on Medtronic. The Motley Fool has a disclosure policy.