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Medtronic Stock After the Mazor Robotics Acquisition

“Our favorite holding period is forever,” said Warren Buffet once, and that’s the sort of mindset that we use when investing our own money. While we’re constantly coming across interesting technologies to invest in, we also see plenty companies crash and burn after everyone thought they would be the next Microsoft. If you’re going to hold a stock forever, you need a simple way of determining how likely it will be that the company can continue to grow over long periods of time while weathering inevitable market recessions. One metric we like to look at is the number of years in a row that a company has increased their dividend. Once such a track record is established, companies will usually go to great lengths to keep the run going.

Medtronic Stock and Dividend Growth

One company that’s managed to increase their dividend for 41 years running now is Medtronic (MDT), a $131 billion medical device company that’s managed to grow their dividend by more than 14% every year for the past ten years straight. If you want to see what that looks like, it’s best expressed in the form of a dividend yield increase. Today’s dividend investor might balk at the 2% yield that Medtronic pays today, but here’s how quickly that yield grows at a 14.2% growth rate over ten years:

Year 0 2.0%
Year 1 2.3%
Year 2 2.6%
Year 3 3.0%
Year 4 3.4%
Year 5 3.9%
Year 6 4.4%
Year 7 5.1%
Year 8 5.8%
Year 9 6.6%
Year 10 7.5%

On the tenth year, your investment would be yielding 7.5%. After twenty years, you’d be getting yearly dividends of more than 28% on your original investment. We haven’t even taken into account the stock price appreciation yet. That’s the power of dividend growth investing. In order for Medtronic to keep increasing those dividends, they need to keep increasing their earnings over time. One way to do that is by acquiring other companies that are participating in high-growth markets.

Medtronic Acquires Mazor Robotics

Just today, Medtronic announced the acquisition of Mazor Robotics in what is being described as the biggest Israeli biotech exit to-date. We last wrote about Little Known Surgical Robot Stock Mazor Robotics back in August of 2016 and speculated that “with around $12 billion in cash on their books, it’s not farfetched to think that Medtronic could just easily acquire MZOR in the future.” Medtronics’ cash pile is now $1.6 billion less after acquiring Mazor. As long-time investors in Medtronic, we want to know just what’s being purchased and how it might affect the bottom line.

Last we checked in with Mazor, they had an exclusive distribution agreement with Medtronic to sell the precision-guided surgery devices seen below:

Medtronic Stock: Medtronic's Product Line

Medtronic’s Product Line – Source: Medtronic website

Mazor X is a robotic guidance system, with advanced software, robotics, and instrumentation for spinal surgical navigation. Renaissance is the Mazor Robotics next generation surgical guidance system which can be used for both spine and brain surgery. The latest financial filing from Mazor shows 2017 revenues of around $67 million with 180 of these machines deployed so far. To understand how this acquisition will impact Medtronic’s bottom line, let’s start at the top.

Medtronic’s Restorative Therapies Group

In 2018, Medtronic recorded almost $30 billion in revenues. The company is sub-divided into four groups, one of which is the Restorative Therapies Group (RTG) which accounts for $7.7 billion in revenues or just over 25% of Medtronic’s revenues. We can further breakdown the RTG group into the following areas:

Medtronic Stock: Restorative Therapies Group (RTG) Revenues

Restorative Therapies Group (RTG) Revenues – Source: Medtronic

The sale of Mazor’s devices falls under the “brain” and “spine” categories which collectively account for just over $5 billion in revenues. By now it should be clear that the paltry $67 million in revenues that Mazor brought in during 2017 won’t have much of an impact on Medtronic’s bottom line – today that is. In June of this year, Medtronic held an investor day during which the head honcho of the RTG group talked about growth drivers for the group. These were listed as follows:

Medtronic Stock: RTG Group Growth Areas

Source: Medtronic Investor Presentation

We can see how “spine therapies enabling technology” is a key growth driver for the entire group with a potential $10.5 billion total addressable market in which Medtronic is already the leader. That’s where Mazor’s technology will fit in, and an acquisition here makes sense because of something called “synergies”. Mazor already canned their marketing team since Medtronic salespeople can now just add these new products into their existing product portfolio with minimal effort. Same goes for all the Mazor employees in other overhead departments, many of whom will be receiving pink slips before the year ends.

Conclusions

While the acquisition may not affect Medtronic stock much today, the planning on display here is very assuring. Medtronic starts by looking at the medical device market holistically to determine where the growth will come from in the coming years and which segments they are leading in. They then focus on these high-growth areas which may not affect the bottom line much today, but will grow so quickly that in a decade’s time they will be commanding a sizable portion of the division’s entire revenues. It’s just like that dividend growth example we showed you earlier. Things grow very quickly when compound annual growth rates are in the double digits.

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