Dividend Stock Analysis: Medtronic

| About: Medtronic plc (MDT)

Medtronic, Inc. (NYSE:MDT) manufactures and sells device-based medical therapies worldwide. Medtronic is a dividend champion which has paid uninterrupted dividends on its common stock since 1977 and increased payments to common shareholders every year for 34 years.

The most recent dividend increase was in June 2011, when the Board of Directors approved a 7.80% increase to 24.25 cents/share. Medtronic's largest competitors include Becton Dickinson (NYSE:BDX), C.R. Bard (NYSE:BCR) and Baxter International (NYSE:BAX).

Over the past decade this dividend growth stock has delivered a negative annualized total return of 0.6% to its shareholders. A major reason for that was the fact that the stock was grossly overvalued in 2001, trading at a P/E of over 60. Click to enlarge:

The company has managed to deliver an increase in EPS of 15.20% per year since 2002. Analysts expect Medtronic to earn $3.46 per share in 2012 and $3.79 per share in 2013. In comparison, Medtronic earned $2.86 /share in 2011. Click to enlarge:

What differentiates Medtronic from its competitors is its scale of operations, diversity and depth of products, focus on emerging markets and its culture of innovation. The company has managed to generate higher sales volumes in the past through strategic acquisitions and organic expansions. Future organic growth will be aided by maintaining and growing its strong product pipeline. The company is also focusing on restructuring and realigning its global operations, which is expected to decrease its annual costs by 20 to 25 cents/share by 2012.

The company has been able to generate consistently high returns on equity in the 18% -23% range over the past decade, with the exception of 2002, 2006 and 2007. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time. Click to enlarge:

The annual dividend payment has increased by 17% per year over the past decade, which is higher than the growth in EPS. Click to enlarge:

A 17% growth in distributions translates into the dividend payment doubling almost every four years. If we look at historical data, going as far back as 1978, we see that Medtronic has actually managed to double its dividend every four years on average.

Over the past decade the dividend payout ratio increased slightly from 25% to almost 29%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. Click to enlarge:

Currently Medtronic is trading at 11.50 times earnings, yields 2.90% and has a sustainable dividend payout. I find the stock attractively valued per my entry criteria and I will considering adding to my position in the stock as funds become available.

Disclosure: Long MDT