What Does Medtronic Do With Its Free Cash?

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Many companies talk about how they enhance shareholder value by returning cash through dividends or stock buybacks. But investors shouldn't just take the company's word for it. In this series, we'll investigate how companies have spent free cash flow over the past five years. By doing so, we hope to gain insight into whether the company's management might be good stewards of shareholder capital.

Today, we'll take a look at medical-devices giant Medtronic (NYS: MDT) .

How does it spend free cash?
First, let's have a look at how much free cash flow the company has generated in each of the past five years and how much has gone toward dividends and buybacks.

 Metric

2010

2009

2008

2007

2006

Buybacks$1,181$729$1,282$1,542$3,423
Dividends$940$877$702$534$487
Total Paid$2,121$1,606$1,984$2,076$3,910
Free Cash Flow$3,179$2,263$1,997$2,311$2,040

Source: Capital IQ, a division of Standard & Poor's. as of Aug.18, 2011. Figures in millions.

Medtronic has a tremendous track record of paying dividends, and in June it announced its 34th consecutive year of dividend increases. It's also more than doubled its payout over the past five years.

Despite this illustrious dividend history, buybacks seem to be management's preferred way of returning cash to shareholders, as Medtronic repurchased more than $8 billion of its stock versus $3.5 billion paid out in dividends between 2006 and 2010. A little later on, we'll see whether those repurchases were wise investments or not.

Is the dividend covered?
Next, let's see how much of the company's free cash flow has gone to dividends.

Metric

2010

2009

2008

2007

2006

FCF Payout Ratio30%39%35%23%24%

Source: Capital IQ, a division of Standard & Poor's.

This is what you like to see, especially when the stock is yielding 3% or more as Medtronic is today. Medtronic covers its dividend more than three times with free cash flow, so the current payout seems not only sustainable but also poised for further growth.

Is it a good investor?
Companies are notoriously bad investors in their own stock. Consider that in 2007, when the market was hitting record highs, S&P 500 companies bought back a record $589 billion, versus $246 billion in cash dividends. In 2009, when the market was around its nadir, buybacks hit record lows.

Is Medtronic an exception?

anImage

Source: Capital IQ, a division of Standard & Poor's.

Medtronic has a fairly good track record at buying back its stock at relatively good prices (in hindsight, of course), but its share price has languished in the $30-$40 range since the financial crisis, so it may be still too early to make a call on this one.

Competitors
How does Medtronic's use of free cash flow stack up against some of its major competitors over the past four quarters?

Company

Free Cash Flow

Share Buybacks

Dividends

Medtronic$3,219$1,140$969
Stryker (NYS: SYK) $825$565$259
Baxter (NYS: BAX) $1,809$1,456$698
St. Jude Medical (NYS: STJ) $972$900$69

Source: Capital IQ, a division of Standard & Poor's. All figures in millions as based on trailing-12-month data.

Foolish bottom line
Medtronic is a well-entrenched medical-device company that has solid competitive advantages that generates more than enough free cash flow to increase its dividend and regularly buyback its stock. There are certainly some headwinds facing health-care stocks these days, but Medtronic deserves a place on your watchlist.

At the time this article was published Todd Wenningis the advisor of Motley Fool (UK) Dividend Edge. You can follow him onTwitter. He doesn't own shares of any company mentioned.The Motley Fool owns shares of St. Jude Medical and Medtronic.Motley Fool newsletter serviceshave recommended buying shares of Stryker. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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