Medtronic Dips: Is Now the Time to Buy?

Shares of Medtronic NYSE: MDT are falling following its FQ4 release and guidance, opening up a potential buying opportunity. The question is whether its value, yield, balance sheet and cash flow are enough to keep investors interested and if they should be. The stock is a blue-chip operator in diversified medtech and growing. The growth isn’t robust but stable and supports healthy cash flow.

The cash flow supports a healthy balance sheet that leaves the business in a condition to pursue growth avenues as they arise. Add in the yield well above the broad market average, and the odds are high that the post-release decline won’t last long. 

Medtronic Outperforms in Q4, Offers Solid Guidance, Shares Fall 

Medtronic had a decent quarter in Q4 with revenue of $8.59 billion, up 0.6%, despite the impact of one-offs and divestitures. The revenue beat the consensus by 175 basis points on strength in all segments, and organic growth is more robust. The organic growth topped 5.4%, led by strength in Diabetes. Diabetes beat by 10.9% reported and 11% organically. Cardiovascular and Neuroscience grew in the 5% range while Medical Surgical trailed at 3.5% reported and 4.5% organic. 

Margin news is mixed. The company’s margin narrowed on a GAAP and adjusted basis compared to last year, but the contraction was less than feared. The adjusted earnings of $1.46 are down 7% YOY but outpaced the consensus reported by Marketbeat.com by a penny and include a negative FX impact. As tepid as the Q4 earnings may be, the cash flow news is better. Full-year cash flow is up 12%, and free cash flow is 14%. 

The guidance is as solid as the Q4 results, with steady growth and a widening margin. The company is guiding for 4% to 5% organic growth, 2.2% to 3.7%, including the impact of FX. Earnings are expected to grow at a slightly faster pace of 4% to 6%, and all segments are expected to contribute. Not enough to spur the market to rally but sufficient to support the market at current levels. 

Medtronic Targets 50% Payout Ratio for Capital Return

Medtronic’s healthy, stable business sustains a nice capital return program. The company targets a 50% payout ratio relative to free cash flow, which is growing. Capital returns include dividends and repurchases, which more than offset share-based compensation. The buybacks reduced the share count by 0.5% in F2024 and are expected to continue this year. The dividend is the bulk of the return and is worth 3.25% to investors, with shares near long-term lows. Because FCF is growing and expected to grow, dividend increases are part of the package, and it will take just a few years before Medtronic becomes a Dividend King. 

Analysts and institutions have helped to put a floor in the MDT market. Analysts have the sock pegged at a consensus Hold and have lifted their price targets over the last year. This is significant because the market is trading just above the low end of the range, and the midpoint implies a 15% upside. The first revision following the release includes a reduced price target, but the $84 set by Piper Sandler is still above consensus. Regarding institutional activity, institutions own about 82% of the stock and have been buying on balance for the last seven consecutive quarters, aligning with the market bottom. 

Medtronic at Bottom: Reversal is Possible

Medtronic’s shares are down following the Q4 release because the results, good as they are, underwhelmed investors. However, the market is near the bottom and unlikely to break critical support near $80. The more likely scenario is that the market will support the stock at $80 or higher, sending it back to the top of the trading range. In this scenario, the market may move above $90 toward the consensus $92, an event that would put the market into a complete reversal.

If not, Medtronic should remain range-bound at current levels, where it has a high-yielding value for income investors. 

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