Where Earnings Growth Drives Dividends

01/06/2010 12:00 pm EST


Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of the DRIP Investor, finds a medical-technology giant that has a history of double-digit earnings and dividends growth.

The [current market] environment is tailor-made for large-company, dividend-paying stocks. Indeed, in a less speculative market, investors will likely turn to quality, stable, market leaders throwing off dependable and rising dividend streams.

We have already started to see such a shift in the last couple of months, and I think the trend toward big, dividend-paying blue chips will accelerate in 2010.

During a time when many companies are finding it difficult to grow, Medtronic (NYSE: MDT) continues to see higher revenues and earnings. The medical-technology giant should post record profits in fiscal 2010, and long-term earnings growth should be well above the average for large-company stocks.

The earnings growth has been a big driver of dividend growth—Medtronic’s dividend has increased every year since it was initiated in 1977. With the market beginning to favor large-cap, dividend-paying stocks, Medtronic should find plenty of investor interest.

Medtronic is the world’s largest manufacturer of implantable biomedical devices. The company’s products focus on six areas: cardiac rhythm disease management, spinal and biologics, cardiovascular, neuromodulation, diabetes, and surgical technologies. International sales account for around 38% of total revenue.

Medtronic is a big spender when it comes to research and development, with R&D expenditures totaling around 9% of the company’s roughly $15 billion [annual] sales.

Medtronic has put up relatively solid growth numbers in recent quarters. For the fiscal second quarter ended October 30th, revenue rose nearly 8% to $3.8 billion. Per-share earnings jumped 15%. The company raised its earnings guidance for all of fiscal 2010 to a range of $3.17 to $3.22 per share, a gain of 11% to 13% over fiscal 2009 results.

Revenue growth for the fiscal year should be 5% to 8%. The consensus earnings estimate for fiscal 2010 ending in April is $3.18 per share, jumping to $3.51 per share for fiscal 2011.

Medtronic’s dividend has grown at an average annual rate of roughly 20% over the last five years, and dividend growth should remain well above average. The current yield is 1.9%.

[At Tuesday’s closing price below $45,] Medtronic trades at [about] 4x the consensus earnings estimate for fiscal 2010 and 12x the consensus estimate for fiscal 2011. Those seem like very modest valuations for a firm that is so dominant in its industry.

Health-care stocks have been under a cloud of uncertainty as a result of health-care reform. Still, given that Medtronic’s products are used to treat such widespread ailments as cardiovascular disease, it is likely that demand will only continue to increase.

Investors who want above-average capital-gains potential and a rising dividend stream should consider these shares. Medtronic offers a direct-purchase plan whereby any investor may buy the first share and every share of stock directly from the company. Minimum initial investment is $250.

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