Dividend Portfolio Playoffs Wild Card Game: Covidien Vs. KLA-Tencor

Includes: KLAC, MDT
by: Abba's Aces

In the first round of the Dividend Portfolio playoffs we have #11 seeded Covidien plc (COV) taking on #6 seeded KLA-Tencor Corporation (NASDAQ:KLAC). Covidien is engaged in the development, manufacture and sale of healthcare products for use in clinical and home settings. KLAC is engaged in the design, manufacture and marketing of process control and yield management solutions for the semiconductor and related nano-electronics industries.

The following table depicts the recent earnings reports for each company:




Actual EPS


Estimated EPS


Actual Revenue

($ in billions)

Estimated Revenue

($ in billions)













Covidien is up 19.73% excluding dividends in the past year (up 21.06% including dividends) while KLAC is up 34.79% excluding dividends (up 36.99% including dividends), and the S&P 500 has gained 30.62% in the same time frame. This matchup will be played out in a best of seven game series based on the metrics below. For a complete list of all the metrics utilized in the seven game series click here. Not all the metrics will be looked at if a team can win and win early. This wild-card matchup will determine the winner which will go on to play against Emerson Electric Co. (NYSE:EMR) in the next round of the playoffs for the Dividend Growth Portfolio Super Bowl.

Forward P/E

Forward P/E is the metric of how many times future earnings you are paying up for a particular stock. The earnings portion of the ratio I utilize is the earnings value for the next twelve months or for the next full fiscal year. I like utilizing the forward P/E ratio as opposed to the trailing twelve month P/E ratio because it is an indication of where the stock is going to go in the future. I like to get a glimpse of the future, but will take note of where it was coming from in the past. Covidien carries a 1-year forward-looking P/E ratio of 15.15 which is inexpensively priced for the future right now while KLAC's 1-year forward-looking P/E ratio of 13.47 is also inexpensively priced. Game 1 goes to KLAC.

1-yr PEG

This metric is the trailing twelve month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally the PEG ratio used by analysts is the five year estimated growth rate, however I like to use the one year growth rate. This is because as a capital projects manager that performs strategy planning for the research and development division of a large-cap biotech company I noticed that 100% of people cannot forecast their needs beyond one year. Even within that one year things can change dramatically. I put much more faith in a one year forecast as opposed to a five year forecast. The PEG ratio some say provides a better picture of the value of a company when compared to the P/E ratio alone. The 1-year PEG ratio for Covidien is currently at 1.72 based on a 1-yr earnings growth of 11.48% while KLAC's 1-yr PEG ratio stands at 0.87 with a 1-yr growth rate of 23.82%. KLAC is victorious in Game 2 of the series and takes a two game lead.

EPS Growth Next Year

This metric is really simple, it is essentially taking the difference of next year's projected earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation I like to take a look at the one year earnings growth projection opposed to the five year projection based on what I discussed in the PEG section above. Covidien has a projected EPS growth rate of 11.48% while KLAC sports a growth rate of 23.82%. Though both earnings growth rates are excellent for the coming year, KLAC has now taken a three game lead in this best of seven series.

Dividend Yield

Dividend yield is a no brainer; it must be had in a dividend portfolio. The dividend yield is the amount of annual dividend paid out by a company in any given year divided by the current share price of the stock. In my dividend portfolio I don't discriminate against low yielding stocks as long as they provide excellent fundamental metrics in the form of the forward P/E, the 1-yr PEG and the 1-yr EPS growth rate. Dividends are a way to measure how much cash flow you're getting for each dollar invested in the stock. Obviously, the higher the yield, the better, as long as it is covered by the trailing twelve month earnings. Covidien pays a dividend of 1.9% with a payout ratio of 38% of trailing 12-month earnings while KLAC pays a dividend of 2.84% with a payout ratio of 59% of trailing 12-month earnings. KLAC makes it a clean sweep of Covidien in this wild-card matchup.


Although KLAC won the series against underdog Covidien, Covidien is still a great company. Though I may have to relegate it for another healthcare company once my rebalancing period comes up, I don't like how it is fairly priced right now. I believe I can find a better value dividend stock in the healthcare sector with the same great earnings growth potential. Because I am a value dividend investor the first three matches carried the most importance because they were fundamental metrics and KLAC appeared to be the better valuation stock because it has the greater growth potential. I initially owned Covidien because I thought it would be a great breakup story when it spun-off Mallinckrodt (NYSE:MNK) back in 2013, but now my thesis isn't holding true anymore because the spin-off already took place. After beating Covidien, KLAC will advance to the next round of playoffs and go head to head against the #3 seeded Emerson.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long COV, KLAC, EMR, MNK, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.