(MDT) Medtronic Announces Increase in Dividend

Recently, Medtronic’s (MDT) Board approved a hike in the company’s quarterly dividend to 24.25 cents per share from the current payout of 22.50 cents. This will result in an 8% increase in the company’s annual dividend to 97 cents. The revised dividend is payable on July 29, 2011, to shareholders of record as of July 8.

The move represents the 34th consecutive year of dividend increase by Medtronic and marks the strength of the company’s business model, reflecting its commitment to return value to shareholders with its strong cash generation capabilities.

Separately, Medronic also decided to boost its share repurchase plan. The company’s Board has cleared an additional 75 million of shares to its repurchase program which represents approximately 7% of its outstanding stock.

Over the past six years, Medronic repurchased more than $9 billion of its common stock or 195 million shares. During fiscal 2011, the company repurchased roughly $1 billion of its common stock.

Medtronic exited fiscal 2011 with $1.38 billion in cash and cash equivalents, marginally down from $1.4 billion at the end of fiscal 2010. Moreover, its debt burden stood at $9.8 billion, after issuing $1 billion of senior notes in March and repaying $2.2 billion of convertible debt in April.

With the repayment of convertible debt, the company’s non-cash charge for convertible debt interest expense for fiscal 2012 will be reduced by half to approximately $21 million per quarter. Medtronic expects to generate $24 billion of free cash flow (“FCF”) over the next 5 years and has set a target of returning 40?50% of FCF to shareholders in the form of dividends and share buybacks.

Medtronic remains more focused on emerging markets and emerging therapies and expects these to be major growth drivers going ahead. Besides, acquisitions should enable the company to record higher revenues in the forthcoming period. A strong balance sheet bodes well for suitable acquisitions in attractive markets.

In the past, the company has used its strong cash balance to diversify its business. Moreover, the company announced a restructuring plan involving workforce reduction and cost control, which should drive the bottom line of the company in the long-term.

However, pricing pressure continues to be a major concern. The company also operates in a highly competitive environment with the presence of players such as Boston Scientific Corporation (BSX) and Johnson & Johnson (JNJ). We are currently Neutral on the stock.

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