Should You Buy Medtronic Stock for Its 3.3% Dividend Yield?

Key Takeaways:

• The 2-Minute Valuation Model values MDT stock at $102 per share in 2 years.
• That’s a potential 15% upside from today’s price of $84.
• With a dividend yield of around 3.3%, Medtronic offers approximately 10% total annual return potential.
• MDT stock currently trades at 14.7x forward earnings, which is well below its 10-year historical average of 17.7x.
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Medtronic (MDT), one of the world’s largest medical technology companies, appears to be trading at a significant discount to its intrinsic value, offering an attractive opportunity for patient investors.

Let’s examine why this healthcare giant might offer some upside with relatively low downside risk.

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What is the 2-Minute Valuation Model?

Three core factors drive a stock’s long-term value:

1. Revenue Growth: How big the business becomes.
2. Margins: How much the business earns in profit.
3. Multiple: How much investors are willing to pay for a business’s earnings.

Our 2-Minute Valuation Model uses a simple formula to value stocks:

Expected Normalized EPS * Forward P/E ratio = Expected Share Price

Revenue growth and margins drive a company’s long-term normalized earnings per share (EPS), and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.

Why Medtronic Stock Looks Undervalued

Forecast

Medtronic is projected to overcome recent challenges and deliver improved earnings growth over the next three years.

Its accelerating growth trajectory suggests the company is successfully navigating supply chain disruptions and competitive challenges that had previously hampered performance.

The company is expected to see earnings rebound in 2025 and grow in the mid-single-digits over the next 3 years.

This earnings growth for MDT stock is likely to be driven by:

• Leading Market Position: Medtronic holds dominant positions in cardiac devices, surgical tools, diabetes management, and neuroscience technologies, providing competitive advantages and pricing power.
• Innovation Pipeline: The company invests over $2.5B in R&D annually which is pretty significant. The company also has a big pipeline of new products that are expected to drive future growth as they come to market.
• Demographic Tailwinds: An aging global population increases the demand for medical devices, creating natural growth drivers for Medtronic’s core business segments.
• Margin Improvement Potential: Recent restructuring efforts and cost-cutting initiatives are expected to drive operating margin expansion, potentially leading to earnings growth that exceeds revenue growth.
• Consistent Dividend Growth: Medtronic has increased its dividend for over 45 consecutive years, making it a Dividend Aristocrat and demonstrating its commitment to returning capital to shareholders.

View MDT’s full analyst estimates (It’s free) >>>

Is MDT Stock Undervalued Right Now?

Medtronic currently trades at a valuation that looks compelling relative to its history and the broader market.

The stock has averaged a 17.7x P/E multiple over the past 10 years, suggesting it could be undervalued if the company achieves its projected earnings growth.

Additionally, Medtronic offers a solid 3.3% dividend yield, providing investors with steady income while waiting for potential price appreciation.

For our valuation, we will use a forward P/E multiple of 16x, which is slightly below the stock’s historical 10-year average.

Fair Value of MDT Stock

Using our 2-Minute Valuation Model and applying a conservative approach:

• Conservative 2027 EPS estimate: $6
• Conservative forward P/E multiple: 16x
• Expected dividends in the next 2 years: $6

Expected Normalized EPS ($6) * Forward P/E ratio (16x) + Dividends ($6) = Expected Share Price ($102)

The 2-year expected MDT stock price we would get from this valuation is $102 per share.

With MDT stock currently trading at around $84, this implies a potential upside of approximately 21% over the next two years or a 10% annualized return.

This isn’t a stellar annual return, but it’s possible the stock could fall even more and make shares look more attractive.

Keep in mind, this is just a valuation exercise, and we don’t know for sure what the stock’s price will be in the future.

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What is the Target Price for Medtronic Stock?

Analysts have an average price target of around $97 per share for MDT stock, indicating they see about 15% upside from its current share price:

Risks to Consider

While our valuation suggests meaningful upside, investors should be aware of several risks:

• Competitive Pressures: The medical device industry is highly competitive, with both established players and innovative startups threatening market share.
• Regulatory Hurdles: Medtronic operates in a heavily regulated industry, where approval delays or unexpected regulatory changes could impact product launches.
• Pricing Pressure: Government and insurer efforts to contain healthcare costs worldwide could impact pricing power and margins.
• Currency Fluctuations: As a global company, Medtronic is exposed to foreign exchange risks that can impact reported earnings.
• Integration Challenges: The company’s growth strategy includes acquisitions, which always carry integration risks and the potential for overpayment.

Despite these risks, Medtronic’s current valuation provides a margin of safety, potentially limiting downside while offering attractive total return potential.

TIKR Takeaway

Medtronic represents an opportunity to invest in a healthcare leader with a strong competitive position, improving growth trajectory, and attractive valuation.

For investors seeking a combination of income and growth at a reasonable price, MDT offers a compelling value proposition.

The stock’s current discount to historical valuation provides a potential catalyst for price appreciation if the company executes on its growth initiatives. Combined with its dividend yield, Medtronic could deliver double-digit annual returns with relatively lower risk compared to the broader market.

Is MDT stock a buy over the next 24 months? Use TIKR to check the stock’s analyst price targets, growth forecasts, and see if the stock is undervalued today.

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Disclaimer:

Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any stocks mentioned. Thank you for reading, and happy investing!