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The Free Cash Flow Estimates of Medtronic in 2018 and Beyond

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Medtronic’s free cash flows

In the current fiscal year, for the six months ended October 27, 2017, Medtronic (MDT) reported free cash flows of ~$1.1 billion. Despite weak performance in the current quarter, Medtronic expects its free cash flows to grow in the high single digits compounded annually from fiscal 2016 to fiscal 2018, on a comparable basis.

Medtronic generates a third of its free cash flows in the first quarter of the fiscal year. In fiscal 2017, the company had generated ~$5.6 billion of free cash flows.

Peers Zimmer Biomet Holdings (ZBH), Stryker (SYK), and Becton, Dickinson and Company (BDX) generated free cash flows of $344.0 million, -$63.0 million, and $866.0 million, respectively, in their recently reported quarters.

Major factors impacting free cash flows

The divestiture of a part of Medtronic’s PMR (Patient Monitoring and Recovery) business to Cardinal Health had an impact on the company’s free cash flows in fiscal 2Q18. For details of the deal, please read Divestiture of a Part of Medtronic’s PMR Business to Cardinal Health.

The divestiture-related expenditures and the loss of free cash flows related to the divested business impacted the company. Some of the pension plan contributions that were made in fiscal 2H17 were made in fiscal 2Q18.

The company had some additional tax payment obligations in the quarter. Medtronic expects some tax and legal settlements in fiscal 2018, which could impact its free cash flows.

Share repurchases

In fiscal 2Q18, Medtronic used a portion of its divestiture proceeds toward stock buybacks. The total share repurchases in the quarter came in at ~$568.0 million. For the six months ended October 27, 2017, the company made total share repurchases of ~$1.9 billion.

Along with the dividends of ~$622.0 million, the company’s total payout ratio stands at 82.0%. As one of the biggest dividend ETFs, the Vanguard Dividend Appreciation ETF (VIG) holds ~3.0% of its total holdings in MDT.

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