Medtronic has been actively expanding its business in emerging markets, particularly China and India. The company’s total sales are currently rising around 4% annually, while sales to emerging nations are growing at a much faster 13% rate. However, emerging markets still only make up a small portion (12%) of Medtronic’s total sales. The company has stated that it plans to grow this to 20% over the next three years.
Financial strength
Aside from being one of the most consistently growing companies in the market, Medtronic is very financially strong. The company actually has a positive net cash position (cash minus debts) of about $1.3 billion and uses its cash flow very responsibly in terms of dividends and buybacks. The company pays a modest, but nice dividend of just over 2%, which represents a payout ratio of just 30%. Back to our theme of consistency, the dividend has been raised every year and has more than quadrupled in the last decade.
Medtronic has also done a good (and consistent) job of creating value for its shareholders through buybacks. Since 2010, the number of outstanding shares has been reduced by about 3% every year, and I see this continuing for the foreseeable future.
A few competitors
There are several other choices in the sector, so let’s take a quick look at a couple to see if Medtronic is really a better choice.
Becton, Dickinson and Co. (NYSE:BDX), another maker of a variety of medical supplies and equipment, is about 40% of the size of Medtronic. The company has done a better job of capitalizing on emerging markets, which make up 24% of its sales, but it lacks Medtronic’s consistency and financial strength. When looking at such valuation parameters as dividends and buybacks, both companies are strikingly similar. The main reason I prefer Medtronic is that it trades at a cheaper valuation (trailing 12 months P/E of 16.0 compared with 17.5 for Becton, Dickinson and Co. (NYSE:BDX)) and is stronger financially (Becton has net debt of about $1.6 billion).
Baxter International Inc. (NYSE:BAX) is closer to Medtronic in terms of size, and there are some compelling reasons to consider investing in Baxter. The company produces medical equipment focused on blood and the circulatory system, and it is the leader in several of its target markets. Although the company is the most “expensive” of the three at 17.7 times trailing-12-months earnings, it does pay the best yield (2.76%) and has an excellent record of raising the payout, which is sure to appeal to income investors. Baxter International Inc. (NYSE:BAX) also has an excellent record of consistent growth, and is very geographically diverse with just 43% of sales coming from the U.S. On the downside, the company carries a $2.3 billion net debt load, and has the highest payout ratio of the three, although it is not excessive by any definition.
Conclusion
In investing, steady and predictable growth wins over the long term. Although Medtronic’s 7.6% average annual earnings growth isn’t going to make you rich overnight, it is a very good return for what I view as one of the lower-risk long term investments there is. All three of the companies mentioned are worthy of consideration, but Medtronic wins in my book on a valuation basis, as well as for its excellent record of creating value for its shareholders.
The article Look to This Medical Equipment Leader for Consistent Growth originally appeared on Fool.com and is written by Matthew Frankel.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Becton Dickinson (NYSE:BDX). The Motley Fool owns shares of Medtronic.
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