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How St. Jude’s Capital Allocation Strategy Affects Shareholders

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Mergers and acquisitions

St. Jude Medical (STJ) is focused on growth through innovation, aided by a number of tuck-in acquisitions. The product portfolios acquired through these acquisitions are often advanced and innovated through internal research and development. In 2015, St. Jude made its largest acquisition—Thoratec—valued at $3.3 billion. The acquisition added the largest portfolio of mechanical circulatory support devices for advanced heart failure treatment.

In 2014, St. Jude made some very significant acquisitions, including Endosense, CardioMEMS, NeuroTherm, and Nanostim. They contributed significantly to the company’s 2015 sales.

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Debt repayment vs. share repurchases

St. Jude Medical financed its $3.3 billion acquisition of Thoratec in October 2015 through debt. St. Jude’s total debt by the end of 2015 was $6.4 billion compared to a total debt of $3.9 billion at the end of 2014. In 4Q15, the company repaid approximately $700 million of the outstanding debt.

The company aims to lower its leverage ratio by the end of 2017 with a target debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 2x. St. Jude has prioritized paying down its debt over share repurchases and M&As (mergers and acquisitions) in the short term. St. Jude returned $500 million to shareholders through share repurchases in 2015 compared to $476 million in 2014.

Dividend distribution

St. Jude Medical has been distributing increasing dividends since 2011. It has a dividend payout ratio of 37.8%. In 2015, the company distributed dividends of $0.29 per share for each quarter, totaling ~$322 million. It also announced a quarterly dividend of $0.31 per share to be paid on April 30, 2016. That represents an increase of ~7% compared to dividends distributed in the previous quarter.

Medtronic (MDT) declared a quarterly dividend of $0.38 per share in March 2016. Abbott Laboratories (ABT) declared a quarterly dividend of $0.26 per share in April 2016. Edwards Lifesciences (EW), a major competitor of St. Jude Medical, hasn’t announced any dividend for the recent quarter.

You can consider investing in the iShares Russell Mid-Cap ETF (IWR), which holds approximately 0.27% of its total holdings in St. Jude Medical.

In the next part, we’ll look at St. Jude Medical’s valuation compared to its peers.

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