A new research paper from a Federal Reserve economist estimates that the probability of the U.S. entering a recession in the next four quarters is slightly more than 50%. Due to numerous factors, it's more likely than not that the economy will soon experience a downturn.
With this information on hand, investors can prepare themselves and their portfolios for such an event by purchasing shares of companies operating in recession-resistant sectors of the economy. The medical devices giant Stryker (SYK 0.15%) is certainly a resilient company. But should investors seeking growing dividends buy the stock now? Let's dive into Stryker's fundamentals and valuation to find out.
Stryker consistently outperforms expectations
Despite supply chain challenges that many companies have dealt with in recent quarters, Stryker reported strong first-quarter results for the period ended March 31. The company topped analysts' predictions for both net sales and non-GAAP (adjusted) diluted earnings per share (EPS) for the quarter.
Stryker recorded $4.3 billion in net sales during the first quarter, which represents an 8.1% growth rate over the year-ago period. This surpassed the average analyst net sales estimate of $4.2 billion for the quarter. How did the company pull off a net sales beat for the eighth quarter out of the last 10 quarters?
Stryker launched several products from the second quarter of last year through the first quarter of this year. This includes the company's safety-sponge system called the SurgiCount+, which ensures that patients don't have any remaining surgical sponges in their bodies from a surgical procedure.
Product launches and improvement in surgery volumes helped Stryker to generate 9.2% organic net sales growth in the first quarter. A 0.7% increase in net sales that came from acquisitions was more than offset by an unfavorable foreign currency exchange rate headwind of 1.8% during the quarter.
Stryker posted $1.97 in adjusted diluted EPS for the first quarter, which was 2.1% higher year over year. This exceeded the analyst consensus adjusted diluted EPS forecast of $1.93 in the first quarter. How did Stryker come out ahead of the analyst earnings consensus for the seventh quarter out of the past 10 quarters?
Aside from the company's higher net sales base, its non-GAAP net margin fell 110 basis points over the year-ago period to 17.6% for the quarter. Along with a 0.3% increase in its weighted-average outstanding diluted share count to 382.7 million, this is why Stryker's earnings growth lagged behind its net sales growth in the first quarter.
As supply chain issues are eventually resolved and Stryker launches more products, earnings growth should accelerate compared to the first quarter. Analysts believe that the company will produce a 7.9% annual earnings growth over the next five years.
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The payout appears to be safe and set to grow
Stryker's dividend looks positioned to raise ever higher in the years to come. This is because Stryker's dividend payout ratio is anticipated to be 28.8% in 2022.
Considering the company's high-single-digit annual earnings growth potential, I believe Stryker is capable of at least high-single-digit annual dividend growth as well. This makes up for the fact that its 1.4% dividend yield is below the S&P 500 index's 1.6% yield.
A wonderful company at a fair valuation
Stryker is a fundamentally healthy company. And the market appears to be taking account of that with its current valuation of the stock. Stryker is trading at a forward price-to-earnings ratio of 20.5 -- hardly a steep valuation for a company expected to grow earnings at a high-single-digit rate each year.
The stock's price-to-sales ratio of 4.3 is only slightly above its 10-year median of 4.2. Given that Stryker's fundamentals seem to be as robust as ever, this valuation is arguably warranted. This is why the stock remains a blue-chip buy for investors.
