Prior to the Great Recession of 2008, Stryker Corp (NYSE:SYK) represented a growing healthcare stock that the stock market loved to overvalue. However, the Great Recession brought this high-quality healthcare company's stock price down to a reasonable valuation that was supported by its fundamentals. Therefore, investors seeking growth with a dividend kicker now have the opportunity to invest in this high-quality healthcare selection that is poised to benefit from the economic opportunity of our aging population.
With interest rates hovering near all-time lows, investors needing income are faced with very limited choices. The traditional high yield available from bonds and other fixed income vehicles are no longer available to meet the goals of retirees needing income to live off. Moreover, it is almost a certainty that today's low yields are not adequate enough to fight inflation. Consequently, there is a growing investor interest in dividend paying common stocks, especially those that have a long record of increasing their dividend every year.
Growth and dividend income stocks are defined as companies that provide the opportunity for long-term capital appreciation and a growing dividend income stream over time. Both, capital appreciation and dividend growth will generally be consistent with the company's average earnings growth, assuming there is a strict adherence to sound valuation.
Stryker Corp: Large-cap Growth at an Attractive Price
About Stryker Corp
"Stryker is one of the world's leading medical technology companies and is dedicated to helping healthcare professionals perform their jobs more efficiently while enhancing patient care. The Company offers a diverse array of innovative medical technologies, including reconstructive, medical and surgical, and neurotechnology and spine products to help people lead more active and more satisfying lives."
Earnings Determine Market Price: The following earnings and price correlated graphs clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings. Here is a link to a live and fully functioning graph on Stryker Corp. We suggest running graphs over numerous time frames as part of a more comprehensive fundamental analysis.
Stryker Corp: Historical Earnings, Price, Dividends and Normal PE Since 1998
Performance Table Stryker Corp
The associated performance results with the earnings and price correlated graph, validates the above discussion regarding the two components of total return, capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.
When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 13.2% capital appreciation, long-term shareholders of Stryker Corp would have received an additional $32,911.97 in dividends that increased their total return from 13.2% to 13.6% per annum.
The following graph plots the historically normal PE ratio (the dark blue line) correlated with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as low as it has been since 1998.
A further indication of valuation can be seen by examining a company's current price to sales ratio relative to its historical price to sales ratio. The current price to sales ratio for Stryker Corp is 2.49 which is historically low.
Looking to the Future
Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:
1.The rate of change (growth rate) of the company's earnings
2.The price or valuation you pay to buy those earnings
Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance.
Therefore, it logically follows that measuring performance without simultaneously measuring valuation is a job half done. Stryker Corp is clearly an industry leading superior business, which based on the consensus estimates from leading analysts, appears to be capable of growing earnings at an above-average rate for the foreseeable future. At its current price, which is attractively aligned with its True Worth™ valuation, Stryker Corp represents an opportunity for growth at a reasonable price. The important factor is that Stryker Corp, with its strong balance sheet and potential for future earnings growth, has real assets and cash flow underpinning its stock price. This solid economic foundation offers shareholders the potential for both a strong margin of safety and an opportunity for outsized future returns.
The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.
The consensus of 24 leading analysts reporting to Capital IQ forecast Stryker Corp's long-term earnings growth at 11%. Stryker Corp has low long-term debt at 19% of capital. Stryker Corp is currently trading at a P/E of 13.6, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Stryker Corp's True Worth™ valuation would be $102.47 at the end of 2017, which would be a 12.8% annual rate of return from the current price.
Earnings Yield Estimates
Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stake holders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.
Since all investments potentially compete with all other investments, it is useful to compare investing in any perspective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in Stryker Corp to an equal investment in 10 year Treasury bonds, illustrates that Stryker Corp 's expected earnings would be 6.3 times that of the 10 Year T-Bond Interest. (See EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.
Summary & Conclusions
This report presented essential "fundamentals at a glance" illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although, with just a quick glance you can know a lot about the company, it's imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.
We believe that Stryker Corp represents a very high-quality company that is currently trading at a low valuation relative to its future earnings power. Furthermore, we believe that estimates of future earnings power are conceivably underestimated due to the pessimism hangover caused by the Great Recession. Consequently, we believe that today's valuation offers a good margin of safety that makes this company worthy of a more comprehensive due diligence effort. Investors seeking above-average growth with a dividend kicker might want to look closer at this excellent selection.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
Disclosure: I am long SYK.