On Thursday, Medtronic (MDT), which produces and sells medical devices, announced that the board has accepted a plan to raise the quarterly dividend by 9% to more than 20 cents per share. The annual dividend now comes to 82 cents per share and at prices as of Wednesday’s close the yield is about 2.5%. The company’s Chairman and CEO Bill Hawkins was quote as saying,
“Today’s actions demonstrate both the board of directors’ and management’s strong confidence in the long-term strength of the company’s cash-flow generation and continued commitment to returning capital to shareholders. Our on-going commitment to return a minimum of 40 to 50 percent of our free cash flow to shareholders each year allows us to offer Medtronic investors enhanced returns through dividend increases and ongoing share repurchases, while also making disciplined, strategic investments for sustainable earnings growth.”
In addition, the company’s management sent a signal to the market that they believe the stock is simply too cheap right now, as they increased the share buyback program to some 60 million shares, or 5.4% of the total outstanding. This is an aggressive move certainly, but one that seems reasonable based on Ockham’s rating methodology. Currently, Medtronic receives our most bullish valuation of Greatly Undervalued because the company’s fundamentals would suggest a much higher price. For example, over the past ten years the market has been willing to pay between 17.2x and 24.3x cash earnings but the current price-to-cash earnings is much lower at 10.7x. Similarly price-to-sales has normally ranged between 4.2x and 5.9x, but the current metric is 2.3x. In order for Medtronic to trade back on the low end of its price-to-cash earnings and price-to-sales, given current fundamentals, the stock would trade at around $52!
As you can see from our historical valuation chart, we have been positive on this stock for some time, but as of yet the market has not responded to the apparent value present in Medtronic. Today’s actions may be enough to spark a little more interest, but as of mid day the shares are trading up only a little more than 2%.
One other thing to take note of is a developing story being reported by the Wall Street Journal. The article alludes to a former Army surgeon who has been hired as a consultant for Medtronic, and was paid handsomely for his services. However, a study that he headed has been rejected as it was based on falsified information to the benefit of Medtronic. The details are still being sourced but Medtronic claims the study was independent of his consulting services and was in no way influenced by Medtronic. The truth will come out in time, but at this point nothing is explicitly clear about how this will effect Medtronic stock. The timing of this announcement by Medtronic is interesting though as the share buyback and dividend increase coincides with the same day that the reported conflict of interest is brought to the public.