Should Investors Buy This Dividend Growth Stock?

Economic data in recent weeks has sparked a belief among some investors and economists that the Federal Reserve could begin cutting interest rates by the end of this year. This has led the S&P 500 index to surge 7% higher so far in 2023.

Shares of medical devices company Stryker (SYK -0.01%) have fared even better, ripping 8% higher year to date. But is the stock still a buy for investors seeking dividend growth? Let’s delve into Stryker’s fundamentals and valuation to figure this out. 

Revenue and profits keep floating upward

Improving the lives of more than 100 million patients each year in over 75 countries, Stryker has established itself as a dominant medical devices company. The Michigan-based business currently boasts a $101 billion market capitalization, which makes it the second-biggest medical devices company in the world, behind Medtronic

Stryker recorded $5.2 billion in net sales for the fourth quarter ended Dec. 31, which was a 10.7% year-over-year growth rate. How did the large-cap company post such impressive growth for its size?

Stryker’s dedication to research and development to drive innovation continues to pay dividends. The company launched the Q Guidance System late last September to help surgeons with surgical planning and navigation more than ever before. Earlier that same month, Stryker launched the Gamma4 System to help orthopedic surgeons treat both stable and unstable bone fractures.

These were just two of several product launches that have occurred over the last year, which played a role in pushing the company’s organic net sales 13.2% higher during the quarter. Acquisitions in Stryker’s medsurg and neurotechnology segments propelled net sales upward by 1.3%. These net sales gains were partially offset by an unfavorable foreign currency translation of 3.8%, which was due to the company’s extensive international operations and an unusually strong U.S. dollar.

Stryker’s non-GAAP (adjusted) diluted earnings per share (EPS) rose 10.7% over the year-ago period to $3.00 in the fourth quarter. Because of disciplined cost management, the company’s total operating expenses increased just 8.8% year over year for the quarter. This resulted in a 10-basis-point increase in Stryker’s non-GAAP net margin to 22.1% during the quarter. 

Looking out over the next five years, the company’s future appears to be bright. Analysts believe that additional product launches and acquisitions will lead to 9.2% annual adjusted diluted EPS growth during that time. For context, this is just below the medical devices’ industry average growth outlook of 10.5%.

Robust dividend growth can be maintained

SYK Dividend data by YCharts

Stryker’s 1.1% dividend yield likely isn’t going to wow income investors when compared to the S&P 500 index’s 1.6% yield. But it’s important to point out that isn’t where the company shines. Having nearly tripled its quarterly dividend per share from $0.265 in 2013 to $0.75 this year, Stryker is a bona fide dividend growth stock.

And with the dividend payout ratio set to clock in at just under 30% in 2023, the company should have plenty of room for future dividend growth. That’s because this low payout ratio leaves the company with the capital necessary to invest in acquisitions, reduce debt, and repurchase shares, which could fuel further adjusted diluted EPS growth moving forward. 

A sensible valuation for a wonderful business

Stryker is a fundamentally healthy business. And at the current $264 share price, the stock doesn’t seem to be excessively valued.

Stryker’s forward price-to-earnings (P/E) ratio of 24.2 is just below the medical devices industry average forward P/E ratio of 24.3. Given Stryker’s remarkable consistency and status as a leading player in its industry, this arguably makes the stock a buy for dividend growth investors

Kody Kester has positions in Medtronic Plc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.