The company has been appealing to value investors as its dividend yield is 2.9%,the P/E ratio is under 10, and the P/S ratio is 2.3. Furthermore, Medtronic had a annual average earnings growth of 10.1% over the past 10 years.
The stock has struggled over the last two years, trading in a range of $32 to $46 and is currently trading near its two-year low.
Why have investors punished the stock?
First, the company carries significant debt — $10 billion. However, Medtronic has $2.4 billion in cash and short-term investments, meaning that net debt is closer to $7.6 billion. More importantly, investors have to remember that MDT generates over $3.0 billion of free cash flows. It is possible for MDT to pay off its net debt in less than three years. However, with the 10-year bond trading at under 2%, why should the company pay off its debt right now?
Shareholders should be content that the company carries significant debt because returns on equity have been over 20% for several years. The high ROE suggests that the company has a Buffett-esque moat around its business.
In recent months, value investor fund managers such as Joel Greenblatt and John Keeley have loaded up on shares of MDT.
Not only are gurus loading up on MDT — insiders are buying as well. For example, Director Jack W .Schuler bought 10,000 shares last week at an average price of $34.21. Another director named Kendall Powell bought 3000 shares at $35.20.