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Linked here is a detailed quantitative analysis of Medtronic Inc. (MDT). Below are some highlights from the above linked analysis:
Company Description: Medtronic Inc. is a global medical device manufacturer with leadership positions in the pacemaker, defibrillator, orthopedic, diabetes management and other medical markets.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
MDT is trading at a discount to only 3.) above. Since MDT’s tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 17.4% premium to its calculated fair value of $76.08. MDT did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
MDT earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45% MDT earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1977 and has increased its dividend payments for 47 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $336 is below the $500 target I look for in a stock that has increased dividends as long as MDT has. If MDT grows its dividend at 4.3% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 3.75%. MDT earned a check for the Key Metric ‘Years to >MMA’ since its 4 years is less than the 5 year target.
Peers: The company’s peer group includes: The Becton, Dickinson and Company (BDX) with a 1.6% yield and Baxter International Inc. (BAX) with a 3.0% yield.
Conclusion: MDT did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks MDT as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $81.20 before MDP’s NPV MMA Differential increased to the $500 minimum that I look for in a stock with 47 years of consecutive dividend increases. At that price the stock would yield 3.7%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.3%. This dividend growth rate is higher the 4.3% used in this analysis, thus providing no margin of safety. MDT has a risk rating of 1.75 which classifies it as a Medium risk stock.
The company owns a diversified portfolio with a focus on developing products for a wide range of chronic diseases. Although it is exposed to the highly competitive areas of the medical equipment markets, MDT enjoys many competitive advantages including scale (operations and sales), product breadth and financial strength. The stock is trading above my calculated fair value of $76.08. Its valuation and its reasonable yield leads me to give it serious consideration as an addition to my Dividend Growth Stock Portfolio.More By This Author:T. Rowe Price Group Inc. (TROW) Dividend Stock Analysis
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