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Covidien (NYSE:COV) is engaged in the development, manufacture and sale of healthcare products for use in clinical and home settings. On August 1, 2013, the company reported fiscal third quarter earnings of $0.91 per share, which beat the consensus of analysts' estimates by $0.01. Since Covidien spun off Mallinckrodt (NYSE:MNK) the company stock is up 5.43% excluding dividends (up 5.85% including dividends), and is beating the S&P 500, which has gained 3.94% in the same time frame. With all this in mind I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's worth buying more shares of the company right now for the healthcare sector of my dividend growth portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 16.86, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 15.19 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (2.27), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on a 1-year EPS growth rate of 7.44%.

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.11% with a payout ratio of 36% of trailing 12-month earnings (or 52% of free cash flow) while sporting return on assets, equity and investment values of 10.5%, 21.7% and 13.2%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 2.11% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 7 years at a 5-year dividend growth rate of 42.3%!

Technicals

(click to enlarge)

On a technical basis the first thing I look at is the relative strength index [RSI] chart at the top, which tells me if a stock is in the oversold or overbought territory. I see the stock in middle ground territory with a value of 42.73 but with a downward projection, this tells me that there may be a little bit of downside to the stock. To confirm that I will look at the moving average convergence-divergence (MACD) chart next and see that the black line has crossed below the red line and that the divergence bars are increasing in height to the downside indicating there may be a bit of downside coming. As for the stock price itself ($60.53), I see $61.22 acting as resistance and the 200-day moving average acting as support for a risk/reward ratio of about -2.59% and 1.14%.

Recent News

  1. On 19Sep13 the company declared a $0.32 per share quarterly dividend with an ex-date of 08Oct13 and pay date of 05Nov13. This is a dividend increase of 23.1% from the prior $0.26 per share dividend.
  2. The company was initiated with a "buy" rating by Needham on 04Sep13 and placed a price target of $69. Needham states that operating margins are below the industry peers with great room for improvement. Needham also cited the company's excellent free cash flow which should serve investors well with increased dividends and repurchases.

Conclusion

The company is fairly valued based on future earnings. Financially, the dividend payout ratio is very low based on trailing 12-month earnings and free cash flow. I don't doubt management will be able to continue to increase the dividend going forward and at double-digit clips. Based on future earnings the dividend payout ratio goes down to around 32.2% (if the dividend is kept steady). The technical situation of how the stock is currently trading is telling me we might be seeing some downward pressure in the immediate future. I don't really see anything for which to own this stock, it's really just a Plain Jane or an Average Joe. No growth prospects, a low yield, and bearish technicals will keep me from buying anything in the stock for now.

Disclaimer: These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: Covidien Increases Dividend By 23.1%... But Is It A Buy?