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Medtronic Increases Dividend 7% Despite Major Decline in Procedures

Medtronic (MDT) reported earnings on Thursday. The medical device company faced a very challenging operating environment but announced plans to increase its dividend by 7%, marking its 43rd consecutive year of payout raises.

As expected, the coronavirus crisis caused significant disruption for Medtronic's customers (hospitals, surgical centers, other care facilities).

Procedure volumes plunged as health care systems diverted their resources to fighting COVID-19, governments implemented restrictions on elective procedures, and people avoided seeking treatment even for emergency conditions.

For the quarter ending April 24, Medtronic's organic revenue fell 25%. COVID-19 reduced sales in China for the entire quarter but only picked up around six weeks of virus-related revenue weakness for the rest of the world.

As a result, management expects the current quarter to be worse.

However, Medtronic believes the worse of the procedural decline is behind the company and sees "encouraging signs of earlier-than-anticipated recovery in several places around the world."

In China, sales declined around 46% in February and March. April saw declines of around 21%, and in May China has declined in the high teens. In Western Europe, sales dipped 32% in April but are down only around 20% in May.

In the U.S. (about 50% of revenue), Medtronic said it is "clearly seeing procedural improvement" with revenue declines around 30% in the first few weeks of May, which is better than what the company experienced in April.

The pandemic has also interrupted some of Medtronic's recent product launches given the delay in procedures and slowed progress on products entering clinical trials, including its soft tissue robot.

Despite these short-term setbacks, Medtronic's business remains in excellent financial shape.

The company had $10.9 billion of cash at the end of the quarter and an undrawn $3.5 billion credit facility. For context, Medtronic's free cash flow over the last year was $6 billion.

No debt matures until March of 2021 either, and Standard & Poor's maintained its A credit rating, noting the firm has "ample cushion" at the current rating.

Medtronic also still managed to generate over $1 billion in free cash flow last quarter, more than enough to cover its dividend.

Looking ahead, management anticipates a return to normal growth ("mid-single-digit levels") on a 2-year stacked basis (adds revenue together for two years to smooth out volatility) by early 2021.

Elective procedure volume seems likely to rebound to more normal levels over time, and Medtronic's diversified product portfolio helps soften some of the blow in the meantime.

For example, Medtronic saw demand increase for ventilators, patient monitoring products, and diabetes supplies. The company also sells various essential cardiac and respiratory life support products.

With that said, sales and margins will remain under pressure for at least a couple of quarters. Pricing pressure could also increase given the financial strain of many health systems.

Overall, we believe Medtronic's long-term outlook remains intact thanks to the firm's diverse portfolio, innovation, and financial strength. We plan to continue holding our shares in our Top 20 and Long-term Dividend Growth portfolios.

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