Medtronic (NYSE:MDT) Will Pay A Larger Dividend Than Last Year At $0.71

Medtronic plc's (NYSE:MDT) periodic dividend will be increasing on the 11th of July to $0.71, with investors receiving 1.4% more than last year's $0.70. This makes the dividend yield 3.4%, which is above the industry average.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Medtronic's Projected Earnings Seem Likely To Cover Future Distributions

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, Medtronic's dividend made up quite a large proportion of earnings but only 69% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

Looking forward, earnings per share is forecast to rise by 29.2% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 65%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Check out our latest analysis for Medtronic

Medtronic Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The annual payment during the last 10 years was $1.22 in 2015, and the most recent fiscal year payment was $2.80. This implies that the company grew its distributions at a yearly rate of about 8.7% over that duration. Companies like this can be very valuable over the long term, if the decent rate of growth can be maintained.

Dividend Growth May Be Hard To Achieve

The company's investors will be pleased to have been receiving dividend income for some time. Although it's important to note that Medtronic's earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time. Slow growth and a high payout ratio could mean that Medtronic has maxed out the amount that it has been able to pay to shareholders. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 1 warning sign for Medtronic that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.