In a bid to woo its investors, Medtronic plc MDT recently hiked its cash dividend for fiscal 2016 by a hefty 25% from the prior quarterly dividend rate of 30.5 cents per share. This is in line with the medical technology giant’s consistent practice of raising its dividend each year over the past few decades. Incidentally, the current hike marks the 38th consecutive year of dividend increase at the company.
More specifically, incorporating the latest hike, Medtronic’s dividend per share has more than tripled over the past eight years and has increased at a compounded annual growth rate of 18% over the past 38 years.
Following the latest raise, the company’s quarterly dividend now stands at 38 cents per share, which amounts to $1.52 per share annually. This increment has raised the company’s dividend yield to 1.98% compared to the previous yield of 1.59%, considering Medtronic’s share price as of Jun 19, 2015.
The new dividend will be payable on July 17, 2015 to shareholders on record as of June 29. For the time being, a portion of the dividend may be treated for U.S. tax purposes as a return of capital. However, Medtronic expects that its dividend will be treated wholly as a return of earnings over the long term.
With this increase, the company’s dividend payout ratio, as measured on a per share basis, now amounts to 35% of fiscal 2016’s expected adjusted EPS. Going forward, Medtronic plans to bring this ratio to 40% in the next few years, given that management expects to hike dividend further buoyed by the company’s underlying earnings growth.
We note that companies with a consistent track record of dividend increases have always been eye-catchers for investors who look to invest in high-growth yielding corporations. This is precisely because dividend practices give a peek into the financial health and profitability of a company.
According to management, this increased dividend yield to shareholders represents the enhanced financial flexibility experienced currently by Medtronic in cash deployment. Alongside, it also indicates management’s confidence in the company’s ability to earn substantial earnings growth required to support the dividend hike. Medtronic remains committed to return 50% of its free cash flow to shareholders, promising dependable, long-term dividend growth. We believe this recent dividend hike will encourage more investors to buy Medtronic’s shares, which in turn will propel the stock price higher, in the coming days.
Highlighting the company’s mission to consistently reward its shareholders, Medtronic also announced its plans to buy back 80 million shares, or 6% of its total shares outstanding. However, no specific timeline has been set as yet for executing the planned repurchase.
Currently Medtronic carries a Zacks Rank #3 (Hold). Some better-ranked medical products stocks are Bio-Rad Laboratories, Inc. BIO, Hospira Inc. HSP and Vascular Solutions Inc. VASC. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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