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Analyzing SYK’s Capital Deployment Strategy for Investor Value

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Overview

Stryker (SYK) has followed a consistent capital allocation strategy for the past few years. The company’s capital deployment priority remains acquisitions, followed by dividends and share repurchases. The company aims to return value to shareholders consistently, and it generated ~$671 million in cash flow by the end of 2Q16. Stryker has a strong balance sheet and holds ~$3.5 billion in cash and cash equivalents.

By comparison, Stryker’s major competitors Zimmer Biomet (ZBH), Becton, Dickinson and Company (BDX), and Medtronic (MDT) reported net free cash flows of $184 million, $687 million, and $973 million, respectively, in their recently reported quarters.

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Capital allocation strategy

Stryker’s capital allocation strategy over the past few years is depicted in the graph above. M&As (mergers and acquisitions) have consistently been the company’s priority over the years. Some of its most recent M&As include Safewire, Sage Products, Physio-Control, and Synergetics’ neurology portfolio.

Stryker has consistently been paying increasing dividends to its shareholders since 1993. Notably, Stryker accounts for ~1.1% of the total holdings of the Vanguard Dividend Appreciation ETF (VIG). The company has a five-year net dividend growth rate of ~16.6%. It paid a dividend of $0.38 per share to its shareholders on April 29, 2016, a ~10% rise compared to 2015.

Stryker has suspended its deployment of capital toward share repurchases in 2016. Stryker announced the share repurchase suspension in its 1Q16 earnings release, as it had taken on significant debt following some major acquisitions and its Rejuvenate and ABG II recall payments. At the end of 2Q16, the total debt on Stryker’s balance sheet stood at $7.6 billion.

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