Medtronic (MDT) is my top pick in medical devices; it is the largest medical technology company globally, with $30.1 billion in sales in fiscal 2021 (~50% US and ~50% international), notes Prakash Kolli, editor of Dividend Power.

Medtronic has four main business areas: Cardiovascular ($10.8 billion in sales), Medical Surgery ($8.7 billion in sales), Neuroscience ($8.2 billion in sales), and Diabetes ($2.4 billion in sales).

The company has struggled during the COVID-19 pandemic. The pandemic interrupted the long-term growth of elective procedures as patients stayed away from hospitals fearing the risk of infection, and hospitals diverted resources.

In addition, the company has struggled with product approval delays and recalls. Furthermore, Medtronic received an FDA warning letter on its headquarters for the diabetes business, which may take two to three years to resolve.

Despite the near-term challenges, Medtronic is positioned for future growth. The company spends more than $2.5 billion annually on R&D to build its extensive patent portfolio and conduct clinical trials for FDA approval.

Medtronic had 200 product approvals in 2020, more than 190 approvals in 2021, and a robust pipeline for 2022. In addition, the company has invested in 40+ early stage companies with potential for future acquisitions.

The company spent $2.1 billion in fiscal 2021 on acquisitions to bolster its pipeline. Furthermore, Medtronic’s scale, R&D, and manufacturing capabilities make it difficult for new entrants to gain traction. As a result, management thinks it can deliver 5%+ revenue growth and 8%+ earnings per share growth over the long term.

Medtronic has paid a growing dividend for 44 years and is a Dividend Aristocrat. The dividend growth rate is around 10.2% in the past decade and 9.6% in the trailing 5-years. The forward dividend yield is ~2.42% above the 5-year average and the S&P 500’s average.

The relatively low payout ratio of approximately 50% leaves room for future increases. Moreover, the low payout ratio and the A stable / A3 stable investment grade credit ratings provide confidence for dividend safety.

Medtronic's stock price was on a downtrend since late-August 2021 and is now trading just above the 52-week lows. The stock is fairly valued, trading at a price-to-earnings (P/E) ratio of about 18.3X after being overvalued for the past few years.

However, earnings estimates may be low if elective surgeries return to typical growth rates and the company can deliver on its long-term goals. Investors should note that Medtronic is an Irish company for tax purposes. I view the stock as a long-term buy.

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