Medtronic PLC Stock Is a Long Term Investment Lock

MDT stock - Medtronic PLC Stock Is a Long Term Investment Lock

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Medtronic PLC (NYSE:MDT) announced its Q2 2018 results in late November. If you only looked at its top- and bottom-line, I’m pretty confident your takeaway wasn’t to buy yourself MDT stock as an early Christmas present.

Revenues declined 4% in the quarter to $7.1 billion while earnings fell 7% year over year to $2.0 billion. Don’t get me wrong, a $2 billion profit is nothing to sneeze at, but a big chunk of that quarterly gain resulted from the sale of several of its businesses to Cardinal Health Inc (NYSE:CAH) producing a $697 million after-tax gain.

However, when you consider that Medtronic sold the businesses at the beginning of the quarter putting it in the hole before it even got started, combined with the fact it had several natural disasters affecting its business, the quarter turned out to be relatively favorable for MDT stock.

“Our second quarter financial results are very encouraging, when considered in the context of a quarter in which we faced three hurricanes and the California wildfires. Hurricane Maria, in particular, significantly affected our manufacturing operations in Puerto Rico,” said Omar Ishrak, Medtronic chairman and chief executive officer in its earnings press release. “Against this backdrop, we delivered a sequential acceleration in our organic revenue growth, as expected.”

For the entire fiscal 2018, Medtronic expects revenues to grow by 4%-5% excluding currency and 9%-10% growth of earnings per share over the $4.37 it earned in fiscal 2017.

Dependable Results

These kinds of growth numbers might not excite investors used to making bets on biotech stocks, but as far as medical devices’ companies go, this $116 billion market cap is doing plenty to keep MDT stock moving higher.

“We are seeing increased revenue momentum from several important new product launches, which we expect to continue into the second half of the fiscal year,” Ishrak elaborated about Medtronic’s business. “The combination of our growth momentum, business and geographic diversification, as well as our scale in markets around the world contribute to our goal of delivering increasingly consistent and dependable results for our shareholders.”

Dependable results are precisely why InvestorPlace’s Vince Martin recently called Medtronic one of ten retirement stocks to hold forever.

If you’re an income investor, Medtronic’s 2.2% dividend yield should be desirable because of its reliable delivery of earnings growth. Maybe it’s not the home-run variety, but time and an aging population should ensure they grow at a reasonable rate for years to come.

Capital Allocation

The first thing I noticed about the company’s free cash flow for the first six months of fiscal 2018 was that it was less than half ($1.1 billion vs. $2.4 billion) what it was in the first six months of fiscal 2017.

The thing about free cash flow is you can’t assume a lower number is a bad thing. You’ve got to understand why it’s lower before making that determination. 

If you look at the net cash provided by operating activities in the first six months you’ll see that most of the $1.4 billion year-over-year decrease had to do with the sale of the businesses mentioned earlier. Excluding higher taxes paid, expenses related to the actual divestitures as well as almost $200 million in funding for the company pension, FCF increased by 4%.

Furthermore, according to its Q2 2018 conference call, Medtronic will return to shareholders 100% of its free cash flow, well above the company’s stated goal of 50%, a sign it cares about rewarding shareholders.

Bottom Line on MDT Stock

Medtronic stock had a total return of almost 16% in 2017. Already up nearly 6% year to date through January 5, I could see it delivering even higher returns in 2018 given the momentum of its various businesses.

In 2018, I’d be a buyer of Medtronic stock, and then as Vince Martin suggests, you might want to hold it forever because it won’t let you down. 

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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