Medtronic (NYSE: MDT) stock is currently hovering near an eight-year low due to the stock declining by about 23.5% over the past year and 42% from its 2021 high. Does this prolonged drop signal a warning sign for investors or a golden buying opportunity?
As a reminder, Medtronic is considered one of the highest-quality companies in the healthcare sector. This is reflected in the consistent shareholder value creation the company has delivered over the decades, including its 45-year dividend growth streak.
On the one hand, a company of Medtronic’s caliber being on sale is a rare opportunity, and considering one could buy Medtronic today at the same price they could back in 2015, it could signal a generational buying opportunity.
On the other hand, with interest rates on the rise and Medtronic’s earnings and dividend-growth prospects softening, the sell-off in its stock makes total sense as investors now require a higher risk premium/margin of safety.
Therefore, I believe the market has accurately valued Medtronic, and I am neutral on the stock.
Medtronic’s Earnings to Dip in Fiscal 2023
The lack of meaningful earnings growth lately has been a significant contributor to MDT’s underperformance. In fact, its most recent Q2-2023 report did reflect some challenges that caused the company’s management to reevaluate its outlook.
Specifically, for the quarter, revenues reached $7.6 billion, down 3% year-over-year. Lower sales were led by declines of -1.9%, -10%, and -5% in Medtronic’s Cardiovascular, Medical-Surgical, and Diabetes segments, which were somewhat offset by sales growth of 2.3% in its Neuroscience division.
Adjusted net income came in at $1.73 billion ($427 million when unadjusted) or $1.32 per share, down 3.7% and 1.5%, respectively, compared to Fiscal Q2 2022. Lower adjusted net income reflects the decline in sales, while the milder decline in the per-share metric reflects a lower share count due to Medtronic’s share repurchases during the period.
Medtronic’s results were negatively impacted by slow supply recovery and softer market procedure volumes in some businesses. While management expects improvements in the second half of Fiscal 2023, it eased its annual adjusted earnings-per-share estimate from $5.53-$5.65 to $5.25-$5.30. At the midpoint (about $5.28), Medtronic’s earnings-per-share should come just about 5% lower compared to last year.
MDT’s Dividend Growth History is Spectacular but Decelerating
Nobody denies that Medtronic’s commitment toward growing its dividend has been nothing sort of impressive. The company has grown its dividend for 45 consecutive years – a track record only Johnson & Johnson (NYSE: JNJ), Becton, Dickinson & Co. (NYSE: BDX), Abbvie Inc (NYSE: ABBV), Abbott Laboratories (NYSE: ABT), and Walgreens Boots Alliance (NYSE: WBA) have managed to surpass in the healthcare sector.
That said, the pace of Medtronic’s dividend increases has been decelerating, which has also contributed to investors valuing the stock lower. For context, Medtronic’s five-year dividend-per-share compound annual growth rate stood at 19.2% in 2010, 15.8% in 2013, 12.2% in 2018, and 8.4% in 2021, clearly forming a prolonged declining trend. Medtronic’s most recent dividend hike of about 8% further supported the case for a gradually softening pace of dividend growth over time.
Decelerating dividend growth is set to continue, in my view, likely due to management aiming to maintain a healthy payout ratio. In fact, Medtronic’s adjusted earnings per share rose from $3.75 in 2013 to $5.55 last year. Despite management gradually slacking the pace of dividend hikes, the dividend per-share advanced from $1.04 to $2.52 over the same period, pushing the company’s payout from 28% to 45%.
Given the last thing Medtronic should want would be to jeopardize its legendary dividend growth track record, I expect dividend increases to gradually descend into the low-to-mid single digits over the next decade (excluding any unforeseen catalysts that could boost earnings-per-share growth).
Is MDT Stock a Buy, According to Analysts?
Turning to Wall Street, Medtronic has a Hold consensus rating based on five Buys, 13 Holds, and one Sell assigned in the past three months. At $87.71, the average Medtronic price target suggests 10.3% upside potential.
Takeaway – MDT’s Valuation is Fair, but Not a Steal
Despite Medtronic stock descending toward an eight-year low and trading with a high dividend yield relative to its past — now yielding 3.4% — shares are not necessarily a steal at their current price levels.
Earnings are set to slightly decline this year, while dividend growth has been on a long-term deceleration trend. At the midpoint of management’s guidance, the stock trades at a forward P/E ratio of about 14.9x, which I believe is a fair valuation.
Its valuation reflects the potential for earnings-per-share growth in the mid-single digits over the medium term and Medtronic’s overall qualities adequately while taking into account investors’ appetite for higher returns in a rising-rates environment. Conservative dividend-growth investors are likely to find Medtronic attractive here, but I wouldn’t be certain that the stock has already bottomed.