JPM: Medtronic aims for double-digit returns with more buybacks, faster dividends and debt paydown

Medtronic CEO Omar Ishrak

Medtronic ($MDT) is almost exactly a year into the behemoth integration of Covidien. Chairman and CEO Omar Ishrak took the company's presentation at the ongoing J.P. Morgan Healthcare Conference in San Francisco as an opportunity to make the case for the medical device giant as a stock that's able to return a brisk "double-digit" rate of return to investors.

Investors drove up Medtronic stock after the merger was announced in June 2014--but in the last year its shares have been flat. But Ishrak hopes investors will buy into his double-digit plan, which relies upon a mix of sustained mid-single-digit revenue growth, $150 million in additional cost savings over three years as well as bumped up dividend and share repurchase plans.

Ishrak detailed the company's use of its oft-noted $9.3 billion in cash that resulted from an internal reorganization in September. The company has opted for a conservative playbook--committing to $5 billion in share repurchases by the end of fiscal 2018. That's in addition to an existing commitment to return 50% of free cash flow to shareholders. Medtronic is also accelerating its planned dividend payout ratio by 40% faster than previously planned.

In addition, Medtronic plans to pay down some of the almost $36 billion in long-term debt on its books in order to maintain its credit rating. Credit rating agency Moody's has already come out in support of that portion of the plan. The remainder will offer the company financial flexibility to conduct M&A or to pay even more back to shareholders.

Financial maneuvering, not innovation, is at the forefront of Medtronic's strategy. Returning cash in the form of share repurchases and dividends and promising the leeway to do even more is a sure way to warm investor hearts, though.

Ishrak made it clear that he's comfortable with that mid-single-digit revenue growth in the long term--and that he's looking to incentivize shareholders by returning cash.

"We've built the company up in terms of revenue performance for sustained mid-single-digit performance, and that's got some variation across the different growth vectors. But essentially, the diversification that we have, which has been further enhanced by the acquisition of Covidien, is what's enabling us to deliver this kind of consistent performance," he said at the conference.

He added, "So, we still have some ways to go of proving this level of consistency at the mid-single-digit range, and we are confident we can do that."

Given its massive scale, it's obviously tough for Medtronic to move the needle on revenues. It's aligned all of its businesses into four main groups: cardiovascular, minimally invasive therapies, restorative therapies and diabetes.

Ishrak highlighted a couple of areas as particularly ripe for revenue growth--neurovascular and peripheral vascular. He mentioned, in particular, stroke therapy and drug-coated balloons as gaining critical mass.

"So, both of these areas are doing well with above-market and certainly growth above our initial expectations that were in the deal model, helping us accelerate and solidify our growth," said Ishrak at the conference. "And that's why you've seen that the growth actually has been in the upper end of our projection."

Medtronic expects mid-single-digit revenue growth but in the "upper half" of that range. It also bumped up its non-GAAP EPS guidance for fiscal 2016 to $4.36 to $4.40 due to the permanence of the U.S. R&D tax credit. The company's fiscal 2016 is a bit unconventional; it will end on the last Friday in April. The company halted trading of its shares midday on Jan. 11 prior to the announcement of its cash plans.

- here is the announcement

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