Medtronic, Inc. (MDT) develops, manufactures, and sells device-based medical therapies worldwide. This dividend champion has raised distributions for 33 years in a row.
Over the past decade this dividend stock has produced a negative total return of 2.20% per year. The company was grossly overvalued in 2000, ending the year at a P/E of 68 which explains the poor returns over the past decade.
Earnings per share have increased by 14.10% per year since 2001. For FY 2011 analysts expect earnings to grow by 25.40% to $3.50, followed by an 8.60 % increase to $3.80 in FY 2012.
The annual dividend payment has increased by 17% per year since 2000, which was higher than the growth in earnings. The company has managed to achieve that by paying a higher portion of earnings to shareholders in the form of dividends. A 17% dividend growth translates in dividend payment doubling almost every 4 years on average. If we look at the company’s dividend history since 1977, the company has indeed managed to double quarterly dividend every 4 years on average.
The dividend payout ratio has increased from 24% in 2001 to 29% in 2010. Between 2002 and 2007 the company raised dividends at the pace of earnings growth, as evidenced by a stagnant payout ratio during the period. Since then however the company has started to raise dividends at a much higher rate, which indicates that there are high chances that investors could realize a high yield on cost in the future. 
Returns on equity have remained above 19 for the majority of the past decade. Overall the ROE increased steadily over the past decade. 
Overall Medtronic looks attractively valued at a P/E of 12.80, an adequately covered dividend and a yield of 2.50%. In comparison rival CR Bard (BCR) has a P/E of 16.50 and yields 0.90%, while rival Becton Dickinson (BDX) yields 2.10% and trades at a P/E of 14.10. While the stock has gone nowhere for one decade, the company has managed to more than triple earnings per share, which makes it a bargain at current prices. Many companies like Medtronic (MDT), Johnson & Johnson (JNJ) and Becton Dickinson (BDX) were overvalued in 2000, which explains why buy and hold dividend investing didn’t work as well over the past decade. If Medtronic’s earnings growth managed to be half as good as it were over the past decade, the stock could do well over the next decade.
Full Disclosure: Long JNJ and MDT
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