Intuitive Surgical hits on a key point that Buffett should love — it holds a veritable monopoly over soft tissue robotic surgery with its da Vinci surgical system. Robotic surgery, according to the company, has been shown to be just as effective as traditional laparoscopic surgery, with less time spent in the hospital recovering and smaller scars. Intuitive Surgical, Inc. (NASDAQ:ISRG)’s growth rate definitely would suggest this to be case, with the company delivering a compounded annual growth rate of 37.3% since 2003. Furthermore, its surgical machines continue to maintain their high price point because of a lack of any viable competition.
However, Intuitive Surgical, Inc. (NASDAQ:ISRG)’s growth also comes with a hitch, in that the Food and Drug Administration is investigating it regarding mounting complaints from patients who’ve undergone a robotic-surgery procedure. Conflicting data studies from multiple sources and a growing population of people treated is going to make any investigation of this nature long and drawn-out.
Income
Unlike the biotech sector, which devotes almost all of its free cash flow to further research and development, medical-device companies are a bit more liberal with their free cash, and many can be found to pay out reasonable dividends. Counting J&J in the mix, there are seven $10 billion-plus medical-device makers that pay out in excess of a 1.1% yield. Specifically, the three highest-income producers for investors are J&J, with a 3% yield, Smith & Nephew plc (ADR) (NYSE:SNN), which yields 2.7%, and St. Jude Medical, at 2.4%.
As I noted previously, J&J isn’t really a medical-device pure-play — and Buffett already owns shares in the company — so we can easily exclude it. Likewise, St. Jude Medical’s rash of recent recalls (there’s a tongue twister for your next party) is enough cause for concern not to chase after its 2.4% yield. Smith & Nephew plc (ADR) (NYSE:SNN), an orthopedic-implants maker with its 2.7% yield, and Medtronic, with its 2.2% yield, appear to be the safest bets to deliver steady income to investors. Even with a smaller yield, I’d give the nod here to Medtronic, which has boosted its dividend in 35 consecutive years.
The medical-device company Buffett should buy
Unlike last week’s biotech scrum, this is a cut-and-dried case of outperformance that should have Buffett and Berkshire Hathaway knocking on Medtronic, Inc. (NYSE:MDT)’s door to take a position in the company.
From a sustainability perspective, it’s hard to argue against Medtronic’s global appeal, as emerging-market sales grew by 21% in its most recent quarter. In addition, Buffett loves a company whose management takes care of shareholders. Medtronic, Inc. (NYSE:MDT) has boosted its payout in 35 straight years, with that annual payout jumping by an average of 15.3% per year since 2003.
Even though I failed to mention Medtronic, Inc. (NYSE:MDT) in the growth section, CEO Omar Ishrak has a multifaceted plan to keep Medtronic growing. Ishrak’s strategy involves focusing on its emerging-market presence, with a 20% long-term growth target; shifting its device focus to cardiovascular, neuro and orthopedics, and diabetes; and launching Resolute Integrity, its next-generation drug-eluting stent. There is plenty of reasonable mid- to high-single-digit growth potential for Medtronic, which makes its forward P/E of 12 seem like a steal.
Warren Buffett would be wise to take note of Medtronic, Inc. (NYSE:MDT)’s growing potential.
The article The 1 Medical-Device Company Warren Buffett Should Buy originally appeared on Fool.com and is written by Sean Williams.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Berkshire Hathaway, Intuitive Surgical, Johnson & Johnson, and Medtronic and recommends Berkshire Hathaway, Intuitive Surgical, and Johnson & Johnson.
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