Why Stryker is a Great Dividend Growth Stock
– By Nathan Parsh
The activity of Stryker Corp. (NYSE: SYK) was severely affected by Covid-19 in 2020, with elective surgeries postponed or canceled as the healthcare industry grappled with the pandemic. The company’s organic growth rates, historically higher than those of its peers, declined last year.
That changed in the last quarter as Stryker experienced a return to positive organic growth, with many companies seeing improved demand. As a leader in its industry, Stryker is poised to capitalize on the demographics of age. With this tailwind, the company’s long-term growth path remains intact.
Stryker’s technology often outperforms the competition, which is one of the reasons that before last year, the company had an average organic growth rate of 6.4% for the previous four years compared to the average of the sector of 4.2%.
A good example of Stryker’s technology that is poised to take advantage of the growing demand for surgical procedures is its Mako surgical robot. Mako continues to enjoy solid growth rates in the total number of procedures performed, up double digits from 2019. Management said on the conference call that the number of knee and hip procedures that have took place using Mako increased in March and accelerated early. April.
Although the company is no longer distributing its total base to Mako, Stryker had installed more than 1,100 robots by the fourth quarter of 2020. The company estimates that the market for robotic surgeries is large, with the possibility of 4,500 robots worldwide. More and more surgeons are feeling comfortable using a robot to perform hip and knee replacements, which will likely be positive for Mako’s demand.
Stryker is also used to making strategic acquisitions that allow it to expand its market share in a healthcare area or to gain a foothold in a market it is not yet operating.
For example, Stryker purchased Entellus Medical in late 2017, as the company was a leading operator in the ear, nose and throat specialty. Before that, Stryker was not present in this market. As noted above, ENT was one of the top performing businesses in the last quarter for the company.
Most recently, Stryker completed its acquisition of Wright Medical Group in late 2020, which has bolstered the trauma and extremities business of the company. Again, the trauma and the extremities were a highlight for the company. In total, acquisitions added 6.2% to the sales growth reported in the first quarter.
Dividend and valuation analysis
The combination of growth from core business and acquisitions has worked well for shareholders both on the basis of share price performance, but also in terms of dividend growth for the company.
After a 10.6% increase for the Jan.31 payout, Stryker has increased its dividend for 26 consecutive years, calling the company the dividend aristocrat.
The stocks offer a dividend yield of only 1% at the moment, but the low yield is not due to minimal dividend growth on the part of the company. Stryker’s dividend has a compound annual growth rate of 12.1% since 2011.
The expected payout ratio is only 27% using the annualized dividend of $ 2.52 and the midpoint of forecast adjusted earnings per share of $ 9.18. Stryker generally has a low payout ratio, but the projected ratio is even below the 10-year average of 34%.
The free cash flow payout ratio is also on the lower end. Last year, Stryker distributed $ 863 million in dividends while generating free cash flow of $ 2.8 billion for a 31% payout ratio. The previous three years had an average free cash flow payout ratio of 47%.
Stryker closed Thursday’s trading session at $ 250, resulting in a futures price-to-earnings ratio of 27.2. This is a premium over the stock’s five-year price-to-earnings ratio of 25.6, but does not place the stock at an unreasonable overvaluation over its history.
Prior to 2020, Stryker had generated revenue growth for 40 consecutive years. It took a pandemic to end this streak, which is a testament to the strength of the company’s business model. A business model which, according to the leaders, will rebound in 2020.
Stryker is generally among the leaders in its sector in terms of organic growth and has not shied away from making targeted acquisitions to increase its core business.
The dividend has compounded at a double digit rate over the past decade and still has a very healthy dividend payout ratio.
With a business model that will be in an advantageous position to capture the growth of the medical device industry for years to come, a low payout ratio and a double-digit compound annual dividend growth rate, Stryker is an excellent choice. for investors looking for dividends. growth.
Disclosure: The author has a long position on Stryker.
This article first appeared on GuruFocus.