There are many “Buffetisms” out there, and while most are familiar with his saying to “be greedy when others are fearful, and be fearful when others are greedy”, I believe a more thoughtful and insightful statement of his is that “the market is designed to transfer wealth from the impatient to the patient.”
That’s because when many growth stocks are trading at what I would consider to be nosebleed valuations, I’m happily buying into value stocks at what I would consider to be a fraction of what they are worth.
In fact, I don’t mind value stocks remaining underpriced for an extended period of time, as that simply gives me the opportunity to dollar cost average into them to grow my income stream.
This brings me to the following 2 picks, both of which have long track records of raising their dividend for over 25 consecutive years. Both trade at appealing valuations for patient investors willing to go against the grain and be paid to wait with above-average yields, so let’s get started!
#1: Medtronic
Medtronic (MDT) is a healthcare technology whose products serve the areas of Cardiovascular, Medical Surgical, Neuroscience, and Diabetes. This includes proprietary devices such as pacemakers, insulin pumps, spinal implants, ventilators, surgical navigation systems, among others.
MDT stock continues to trade weakly compared to where it was in the Fall of 2021, during which it hit a high of $135. At the current price of $81.37, the stock is down 40% over this timeframe. MDT’s weak stock price performance belies overall strengths in the business. As shown below, MDT’s revenue has more than recovered from hitting a trough in late 2022, with TTM revenue sitting at $32.4 billion.
MDT continued this growth trend in fiscal Q4 2024 (ended on April 26th), during which organic revenue grew by 5.4% to $8.6 billion, exceeding Wall Street analyst expectations by $150 million. Also encouraging, MDT’s adjusted EPS of $1.46 landed at the upper end of guidance and free cash flow grew by 14% YoY to $5.2 billion. MDT’s top-line growth was supported by mid-single digit growth in U.S. and Europe, and by a strong 13% growth in emerging markets, including China, where it’s since emerged from COVID-related lockdowns.
Management is guiding for organic revenue growth in the 4% to 5% range for the current 2025 fiscal year in progress. This is based on the expectation that MDT will extend its leadership in key categories, including the introduction of Aurora EV-ICD, an implantable extravascular defibrillator to treat sudden cardiac arrest, surgical innovations such as the Hugo robotic-assisted surgery system, and the upcoming Simplera Sync sensor integration with MDT’s MiniMed 780G system for the treatment of Diabetes.
Meanwhile, MDT maintains a strong balance sheet with an ‘A’ credit rating from S&P. This includes having a safe net debt to TTM EBITDA ratio of 1.87x, sitting well below the 3.0x market generally considered safe for non-REIT/Utility companies.
This supports MDT’s 3.4% dividend yield, which comes with a safe 53% payout ratio and a 5-year dividend CAGR of 6.7%. While MDT isn’t necessarily cheap the current price of $81.37 with a forward PE of 14.9, it does sit well below its historical PE of 18.2, as shown below.
I believe MDT deserves to trade at its historical PE considering its Dividend Aristocrat status with 46 years of consecutive annual raises under its belt, giving credence to its durability. Moreover, with the aforementioned recent encouraging growth and analysts expecting 7% annual EPS growth over the next 2 years, MDT could reasonably deliver market-level performance even without a reversion to its mean valuation.
#2: Altria
Altria (MO) is officially a Dividend Aristocrat despite having reduced its dividend in 2008, and that’s because its spin-off, Philip Morris International (PM) made shareholders whole from a cashflow standpoint with its own dividend, and has increased it every year since then.
Those who follow the tobacco industry would probably know that it’s currently undergoing its biggest transition in decades, with smokers having expanded options that include vaping, heat-not-burn, and nicotine pouches.
Altria has been somewhat late in the game following its missteps from its failed Juul stake and with peer British American Tobacco (BTI) taking the lead in vaping and Philip Morris International taking the lead in heat-not-burn products through IQOS and nicotine pouches through Zyn.
MO has seen a challenging top-line environment as a result of smokers switching to alternatives and illegal vapes in the U.S. with revenues net of excise taxes declining by 1% YoY during Q1 2024. This was driven in large part by a 10% YoY decline in cigarette volumes, due to natural declines in smoking, higher gas prices, and switching to both legal and illegal products in the vaping category.
Despite challenges in the current operating environment, I believe it’d be a mistake to write off Altria this early in the game as it relates to nicotine transition. This is considering the encouraging volume growth in MO’s NJOY, which continued to see increased market share growth of 0.6% on a sequential QoQ basis to 4.3% at the end of Q1. Also encouraging MO’s nicotine pouch, On!, saw 0.7% sequential market share growth to 7.1%.
In addition, MO recently filed a PMTA with the FDA for NJOY’s blueberry and watermelon flavors with the NJOY ACE 2.0 platform, which has Bluetooth-enabled age restrictions to prevent usage among youths. This, in combination with crackdowns on illegal vaping, could be tailwinds for the company that the market has not fully priced in.
In the meantime, it’s also worth noting that MO still retained an 8.1% stake in Anheuser-Busch InBev (BUD) as of the end of Q1, which it could continue to monetize to buy back shares. MO also maintains a strong balance sheet with a BBB credit rating from S&P and a safe net debt to EBITDA ratio of 2.1x. This includes MO having retired $1.1 billion worth of debt in Q1 alone.
This lends support to MO’s 8.5% dividend yield, which comes with a safe 79% payout ratio that’s in line with MO’s historical ~80% payout ratio. MO’s dividend is also positioned to grow this year, considering that management is guiding for 2% to 4.5% EPS growth this year.
I see value in MO at the current price of $46.25 with a forward PE of 9.1, sitting well below its normal PE of 14.0, as shown below.
Sell side analysts who follow the company estimate 4-5% annual EPS growth over the next two years, which could be driven by price elasticity in traditional smokables in combination with growth in newer categories like On! nicotine pouches and NJOY and share buybacks. As such, MO could deliver above-market total returns when we combine the dividend yield with even the lower end of management’s EPS guidance, and this does not include the potential for share price appreciation to MO’s long-term historical valuation.
Investor Takeaway
Medtronic and Altria present compelling opportunities for patient investors focused on value stocks with strong dividend histories. Medtronic, a healthcare technology leader, offers a 3.4% yield backed by 46 years of consecutive annual raises and robust growth prospects in its cardiovascular and diabetes sectors.
Altria, despite recent challenges in the tobacco industry, maintains an 8.5% yield and potential upside from its NJOY e-vapor business and strategic investments. Both companies, with their solid balance sheets and commitment to shareholder returns, are well-positioned to deliver long-term value through dividends and potential capital appreciation.
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