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The Motley Fool: Medical device king Medtronic warrants closer look

The Motley Fool

If you’re seeking a company that offers regular dividend increases and stable cash flow, consider medical device king Medtronic (NYSE: MDT). The company has increased its dividend for 39 years in a row, averaging annual increases of 12 percent over the past five years. It recently yielded 2.3 percent.

Medtronic has a giant global footprint in the medical device industry, with its product portfolio ranging from pacemakers to insulin pumps and pretty much everything in between. Its stake in nearly every medical device market gives it economies of scale and pricing power. Although Medtronic’s top line hasn’t quite performed as expected in recent quarters, new product launches should help boost revenue.

The company is also beginning to see real benefits from its purchase of Covidien. Being able to move its headquarters to Ireland, a country with a very favorable corporate tax environment, didn’t alter its tax rate much, but it will free up billions in capital that was being held overseas. It also allows Medtronic to better deploy its capital, with a goal outlined in 2014 of reinvesting $10 billion into research and development over the next decade. By next fiscal year, the combined entity could realize $850 million in cost synergies.

Smart income investors would be wise to give Medtronic a closer look. (The Motley Fool owns shares of Medtronic.)

Ask the Fool

Q: What happens if I open a brokerage account and the brokerage goes out of business? – T.R., Augusta, Georgia

A: Fear not. Most brokerages carry Securities Investor Protection Corp. (SIPC) insurance, protecting your account for up to $500,000, including up to $250,000 in cash. (Many carry additional insurance, too.) It protects you in the event of your brokerage failing – but it won’t give your money back if your stock crashes, wiping out your investment. To make sure a brokerage is SIPC-protected, check its website for assurance, or call it up and ask.

Q: Are companies with low profit margins bad investments? – A.L., Manteo, North Carolina

A: High margins are generally preferable, of course. They can reflect some competitive advantages, such as a strong brand that commands a higher price. Amid a price war, companies with higher margins have more wiggle room. Still, you shouldn’t necessarily avoid lower-margin businesses.

Imagine that Lois Inc. (ticker: NEWSY) has a whopping net profit margin of 25 percent, while Clark Co. (ticker: SPECS) has just a 1 percent margin. If Lois sells only a hundred newspapers a year, while Clark sells thousands, Clark is the better buy, generating more total profits than Lois.

Some industries, such as pharmaceuticals, tobacco, financial services and software, typically have high profit margins. Discount stores and supermarkets typically have very low ones – but if they turn over inventory fast enough, they can still be good investments. Kroger’s net margin, for example, was recently 1.8 percent, while Whole Foods’ was 3.2 percent. But Kroger’s volume is much higher, generating far more earnings.

My dumbest investment

My dumbest investment was when I became interested in Elan, an Irish drug company that had just introduced a multiple sclerosis drug. The stock rose to $38 per share, and then, on reports of progressive multifocal leukoencephalopathy (PML), a life-threatening side effect, it plummeted to $8. That’s when I got interested. In the meantime, Elan developed a test to determine susceptibility to PML, and the stock started heading higher. I bought chunks of shares at $4, $6 and $8.

Elan also had a very promising Alzheimer’s treatment in the works. Convinced by little hints that it would be a winner, I jumped all in, eventually buying more than 30,000 shares while the stock shot up to the high $30s. I knew at the time I was overly concentrated in one stock, and I knew at the time it was dumb, but gee – the prospect of a $100 stock price and early retirement was too intoxicating. So I held.

After some disappointing clinical study results, and news that PML had re-emerged, the shares plunged to $9. I hung on and made a little money, but my gluttony and overconfidence amaze me to this day. Feeling stuck in a bad stock for all those years also took a toll. – T.P., online

The Fool responds: Your main mistake, as you know, was having too many eggs in one basket. Be especially careful with biotech companies, as drugs in development don’t always succeed.

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