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Now is a Great Time to Pick Up This Passive Income Stock

The surging inflation and the Fed’s efforts to tame it by aggressively hiking interest rates have led to many analysts forecasting a recession later this year. Investors must consider picking up stocks that generate passive income in an uncertain economic environment. Medtronic (MDT) recently announced an 8% increase in its annual dividend. So, it could be a good choice now. Read more.

Headquartered in Dublin, Ireland, Medtronic plc (MDT) develops, manufactures, distributes, and sells device-based medical therapies to hospitals, physicians, clinicians, and patients worldwide. It operates through four segments: Cardiovascular Portfolio, Neuroscience Portfolio, Medical-Surgical Portfolio, and Diabetes Operating Unit.

After raising the benchmark interest rates thrice this year, the Fed is expected to bring in more such hikes to prevent a further rise in the consumer price index, which hit a 40-year high last month.

Many analysts believe that the Fed’s aggressive monetary tightening measures are leading us towards a recession. Therefore, the stock market is expected to remain under tremendous pressure.

In a situation like this, investors can consider adding fundamentally strong dividend-paying stocks, such as MDT, that can generate a steady income stream irrespective of the market conditions.

MDT announced a dividend increase of 8% to $0.68 last month. Its annual dividend increased to $2.72 from the prior $2.52, marking the 45th consecutive year of dividend increase.

Over the last three years, MDT’s dividend payout has grown at an 8% CAGR. Its four-year average dividend yield is 2.10%, and its current dividend translates to a 3.07% yield. The stock has lost 14.2% in price year-to-date and 29.3% over the past year to close the last trading session at $88.71.

Here’s what could influence MDT’s performance in the upcoming months:

Robust Financials

MDT’s total revenues increased 5.2% year-over-year to $31.68 billion for the fiscal year ended April 29, 2022. The company’s non-GAAP net income attributable increased 25.5% year-over-year to $7.50 billion. Also, its non-GAAP EPS came in at $5.55, representing an increase of 25.5% year-over-year.

Mixed Analyst Estimates

Analysts expect MDT’s EPS and revenue for the quarter ending July 31, 2022, to decline 20.6% and 8.2% to $1.12 and $7.23 billion, respectively. However, its EPS and revenue for fiscal 2024 are expected to increase 8.3% and 5.1% year-over-year to $6.03 and $33.67 billion, respectively. It surpassed Street EPS estimates in three of the trailing four quarters.

Discounted Valuation

In terms of forward non-GAAP PEG, MDT's 1.56x is 11.8% lower than the 1.77x industry average. Its forward non-GAAP P/E of 15.94x is 12.8% lower than the 18.29x industry average. Also, the stock's 15.10x forward EV/EBIT is 5% lower than the 15.90x industry average.

Mixed Profitability

In terms of trailing-12-month gross profit margin, MDT’s 68.41% is 23.9% higher than the 55.18% industry average. Likewise, its 30.37% trailing-12-month EBITDA margin is 670% higher than the industry average of 3.94%.

However, the stock’s trailing-12-month Capex/S and asset turnover ratio came in at 4.32% and 0.34%, which are lower than the industry averages of 4.45% and 0.35%, respectively.

POWR Ratings Show Promise

MDT has an overall rating of B, equating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MDT has a B grade for Value, in sync with its 2.30x forward P/B, which is 7.3% lower than the 2.48x industry average.

It has a B grade for Stability, consistent with its 0.75 beta.

MDT is ranked #16 out of 146 stocks in the Medical – Devices & Equipment industry. Click here to access MDT’s ratings for Growth, Momentum, Sentiment, and Quality.

Bottom Line

With recession fears looming, investors can look to add MDT to their portfolios as the company has a terrific track record of increasing its dividends. Its robust financials and discounted valuation also support the investment case.

How Does Medtronic plc (MDT) Stack Up Against its Peers?

MDT has an overall POWR Rating of B, equating to a Buy rating. You might want to consider investing in the following Medical – Devices & Equipment stocks with an A (Strong Buy) and B (Buy) rating: Olympus Corporation (OCPNY), FONAR Corporation (FONR), and Smith & Nephew plc (SNN).

MDT shares were trading at $89.46 per share on Wednesday morning, up $0.75 (+0.85%). Year-to-date, MDT has declined -13.01%, versus a -20.53% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.


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