Medtronic stock looks cheap

Medtronic stock seems undervalued considering the company’s position in the heart, spinal and diabetes markets – could it be one for your portfolio?

Pacemaker implantation medical procedure
Patented innovations are an enduring competitive advantage
(Image credit: © Alamy)

Medtronic (NYSE: MDT) stock is one of the best ways to invest in the growing demand for global healthcare. The company is a global leader in designing, developing and selling devices that enable patients to live with chronic diseases.

The company’s niche is heart devices. Here it has a market share of around 50% in products such as MRI-safe pacemakers, transcatheter heart valves and defibrillators.

But it also has a strong presence in other device markets, such as diabetes control and renal denervation to control hypertension by lowering blood pressure.

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Where the group really stands out is its commitment to innovation. It spends 8.7% of its sales each year on R&D, that’s the highest in the global healthcare sector.

What’s more, the group spends a lot of time and effort working with the world’s top surgeons to understand their and their patients’ needs.

Why Medtronic stock looks attractive now

Over the past decade the company has been on an acquisition spree. Its $42.9bn acquisition of its Irish rival Covidien in 2014 transformed the business, and since then it has gone on to acquire a number of smaller companies boosting its product lineup and global footprint.

For the financial year to the end of April the company reported a 5.2% increase in sales and 40% jump in net profit.

For UK investors, Medtronic stock offers international diversification to help protect against uncertainty (both political and economic) back home. Last year, 51% of its revenues were generated in the US with the remainder split between other developed markets (32%) and emerging markets (17%).

As I noted above, Medtronic’s earnings jumped 40% last year, and off the back of this growth management raised the firm’s dividend payout by 8%. That might not seem like much compared to the company’s expanding bottom line, but the business has a reputation to keep.

The dividend on Medtronic stock has risen for 45 consecutive years. That put it in the top-35 US dividend aristocrats (firms with over 25 successive years of dividend growth). Management does not want to risk this record by raising the payout too far, too fast.

As well as its dividend the company is also returning profits to shareholders with share buybacks. Last year, the group generated $6bn of free cash flow, of which 92% was returned to shareholders.

Medtronic stock appears cheap

The group is guiding for adjusted earnings per share of $5.53 to $5.65 in its current financial year with analysts projecting earnings of $5.87 on average for the following period.

Based on these estimates, Medtronic stocks is trading at a forward price/earnings (p/e) ratio of 14.1 for 2024. The dividend yield stands at 3.3%.

Healthcare is going to be one of the major investment themes of the next decade as the world’s population gets older and demands better healthcare.

Medtronic stock could be one of the best ways to ride this trend.

Rupert Hargreaves

Rupert was the former Deputy Digital Editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing. 

His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks. 

Rupert has freelanced as a financial journalist for 10 years, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them. 

He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service. 

He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.