Great Dividend Payers In Medical Technology

By Stephen D. Simpson, CFA | May 18, 2010 AAA

There are a lot of solid reasons for investors to include medical technology stocks in their portfolios. The healthcare sector has grown faster than the economy and seems poised to continue to do so, and the more established names in this field routinely post excellent returns on capital. Better still, medical technology is generally spared the feast-famine cycle of patent expirations that bedevil the pharmaceutical sector.

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Now we can add another reason to like medical device stocks - dividends. As many investors already know, the stocks of companies that pay dividends tend to outperform those that do not. When you combine the advantages of dividend-paying stocks with the advantages of medical technology stocks, you have a powerful mix.

Four Names To Investigate
Not many medical device stocks pay dividends, but I believe investors should investigate these four names:

Abbott Labs
Admittedly, Abbott Labs (NYSE: ABT) is something of a "cheat" on this list, as the company does derive a sizable portion of its profits from pharmaceuticals. Nevertheless, this is a company with excellent long-term growth characteristics and compelling drivers for future growth. The company's new stent platform is capturing share from Boston Scientific (NYSE: BSX), and I believe many investors under-appreciate the quality and growth potential of Abbott's diagnostics franchise. With a solid long-term record of cash flow growth, a good return on capital, no major patent issues and manageable debt, I believe dividend-seeking investors can get that coveted "twofer" here - income and growth.

Baxter
Like Abbott, I have to confess that Baxter (NYSE: BAX) does generate a meaningful amount of profit from business outside of what I call medical technology. Still, it is not a pharmaceutical company, so I believe it does belong here. Although Baxter has had some safety and reliability issues, the fact remains that the company invests heavily in innovation and can leverage two cash-rich businesses (medication delivery and renal) while waiting for recombinant and plasma-based therapies to drive the next leg of growth. Here, too, there is a solid history of cash flow performance and a good return on capital. Though Baxter does not appear to have the growth potential of Abbott, it is slightly cheaper.

Medtronic
Hard-core dividend enthusiasts may balk at Medtronic's (NYSE: MDT) relatively measly 1.9% dividend yield, but here I take a page from Wayne Gretzky - skate to where the puck is going to be, not to where it is now. In other words, while Medtronic may not have the highest payout today, I firmly believe that this company will show above-average dividend growth in the years to come. (For more, see A Checklist For Successful Medical Technology Investment.)

Medtronic is a huge player in a number of significant businesses, including cardiac rhythm management, stents, diabetes, spinal care and neurological intervention. While Medtronic is in the midst of an often-awkward transition from fast grower to mature growth, the company produces a lot of cash flow and does not have a record of making dumb deals with shareholders' money.

Becton Dickinson
I have written previously about boring-but-lovable Becton Dickinson (NYSE: BDX). I especially like the combination of a mature-but-lucrative device business and fast-growing molecular diagnostics platform. Like the other names in this article, Becton has posted impressive returns on capital and continues to generate ample free cash flow. Should Becton emerge as a leader in the still-evolving molecular diagnostics market (which could be worth tens of billions of dollars), that dividend payout could grow at an above-average rate over the coming years. (For more, see The Power Of Dividend Growth.)

Four Good Places To Start
Of course, it is vital for every investor to do his/her own due diligence. That said, I am bullish on each one of these names for both the dividend prospects they offer and their relative value in the market today. Given the considerable structural advantages to both healthcare and dividend-paying stocks as investment categories, I think investors could find the combination to be quite powerful for their own portfolios. (For more, see Dividend Yield For The Downturn.)

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