# Medtronic PLC (NYSE:MDT)

## Dividend Discount Model (DDM)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

### Intrinsic Stock Value (Valuation Summary)

Medtronic PLC, dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 9.26%
0 DPS01 2.16
1 DPS1 2.23 = 2.16 × (1 + 3.39%) 2.04
2 DPS2 2.33 = 2.23 × (1 + 4.40%) 1.95
3 DPS3 2.46 = 2.33 × (1 + 5.40%) 1.88
4 DPS4 2.61 = 2.46 × (1 + 6.41%) 1.84
5 DPS5 2.81 = 2.61 × (1 + 7.41%) 1.80
5 Terminal value (TV5) 163.22 = 2.81 × (1 + 7.41%) ÷ (9.26%7.41%) 104.84
Intrinsic value of Medtronic PLC’s common stock (per share) \$114.36
Current share price \$125.53

Based on: 10-K (filing date: 2020-06-19).

1 DPS0 = Sum of the last year dividends per share of Medtronic PLC’s common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.26% Expected rate of return on market portfolio2 E(RM) 11.74% Systematic risk of Medtronic PLC’s common stock βMDT 0.74 Required rate of return on Medtronic PLC’s common stock3 rMDT 9.26%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rMDT = RF + βMDT [E(RM) – RF]
= 2.26% + 0.74 [11.74%2.26%]
= 9.26%

### Dividend Growth Rate (g)

#### Dividend growth rate (g) implied by PRAT model

Medtronic PLC, PRAT model

Average Apr 24, 2020 Apr 26, 2019 Apr 27, 2018 Apr 28, 2017 Apr 29, 2016 Apr 24, 2015
Selected Financial Data (US\$ in millions)
Dividends to shareholders 2,894  2,693  2,494  2,376  2,139  1,337
Net income attributable to Medtronic 4,789  4,631  3,104  4,028  3,538  2,675
Net sales 28,913  30,557  29,953  29,710  28,833  20,261
Total assets 90,689  89,694  91,393  99,816  99,782  106,685
Shareholders’ equity 50,737  50,091  50,720  50,294  52,063  53,230
Financial Ratios
Retention rate1 0.40 0.42 0.20 0.41 0.40 0.50
Profit margin2 16.56% 15.16% 10.36% 13.56% 12.27% 13.20%
Asset turnover3 0.32 0.34 0.33 0.30 0.29 0.19
Financial leverage4 1.79 1.79 1.80 1.98 1.92 2.00
Averages
Retention rate 0.42
Profit margin 13.52%
Asset turnover 0.31
Financial leverage 1.88

Dividend growth rate (g)5 3.39%

Based on: 10-K (filing date: 2020-06-19), 10-K (filing date: 2019-06-21), 10-K (filing date: 2018-06-22), 10-K (filing date: 2017-06-27), 10-K (filing date: 2016-06-28), 10-K (filing date: 2015-06-23).

2020 Calculations

1 Retention rate = (Net income attributable to Medtronic – Dividends to shareholders) ÷ Net income attributable to Medtronic
= (4,7892,894) ÷ 4,789
= 0.40

2 Profit margin = 100 × Net income attributable to Medtronic ÷ Net sales
= 100 × 4,789 ÷ 28,913
= 16.56%

3 Asset turnover = Net sales ÷ Total assets
= 28,913 ÷ 90,689
= 0.32

4 Financial leverage = Total assets ÷ Shareholders’ equity
= 90,689 ÷ 50,737
= 1.79

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.42 × 13.52% × 0.31 × 1.88
= 3.39%

#### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$125.53 × 9.26%\$2.16) ÷ (\$125.53 + \$2.16)
= 7.41%

where:
P0 = current price of share of Medtronic PLC’s common stock
D0 = the last year dividends per share of Medtronic PLC’s common stock
r = required rate of return on Medtronic PLC’s common stock

#### Dividend growth rate (g) forecast

Medtronic PLC, H-model

Year Value gt
1 g1 3.39%
2 g2 4.40%
3 g3 5.40%
4 g4 6.41%
5 and thereafter g5 7.41%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 3.39% + (7.41%3.39%) × (2 – 1) ÷ (5 – 1)
= 4.40%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 3.39% + (7.41%3.39%) × (3 – 1) ÷ (5 – 1)
= 5.40%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 3.39% + (7.41%3.39%) × (4 – 1) ÷ (5 – 1)
= 6.41%