I had a couple questions about a new David Eifrig tease — this is a follow-up to a pitch he made a few weeks ago for his new healthcare-focused newsletter, Prosperity Investor (supposedly priced at $5,000/yr, though launched at $2,000 to “charter subscribers” last month, no refunds), so it’s not really a new full-throated sales pitch. More of a “you didn’t sign up yet, but I just announced a new idea, you’re missing out!” spiel.

So I figured we’d sniff out the answer for you, dear friends, and let you think for yourself about what companies fit your investing criteria. Here are our clues from Eifrig’s email last week:

“It’s one of the world’s leading medical technology companies. And almost every medical student has used one of their products today…

“From 2012 to 2022, the annual dividend has grown 12.2% per year…

“Over the last 20 years, this stock is up ten-fold, rising 945%…”

And he also says that within his portfolio, this is “a specifically ‘inflation-resistant’ recommendation,” which presumably means it’s one of his more “blue chip” healthcare stocks, not one of the more speculative ones he also recommends.

So what’s the stock being pitched? That’s almost certainly the medical equipment company Stryker, which is still primarily known for its orthopedic implants but has expanded its reach meaningfully into other businesses over the years (from buying MAKO surgical a decade ago to expand robotic capabilities, to buying Vocera this year for hospital and patient communications), and also sells a lot of operating room equipment. Orthopedics is now their second largest division, behind what they call “MedSurg and Neurotechnology,” and it’s also recently been growing more slowly, probably in part because of COVID-related delays to some orthopedic surgeries. Here’s how they describe themselves:

“Stryker is one of the world’s leading medical technology companies and, together with its customers, is driven to make healthcare better. The company offers innovative products and services in Orthopaedics, Medical and Surgical, and Neurotechnology and Spine that help improve patient and hospital outcomes.”

I say “almost” certainly because the numbers I come up with are not a precise match for Eifrig’s tease — Stryker paid out 90 cents in dividends in 2002 and is currently paying out $2.80 per year, which is a compound annual dividend growth rate of 12.02%, not 12.2%. There are many ways to calculate this, and the dividend has risen every year, so that’s close enough but not perfect. The total return for Strkyer was extremely close to 945% over 20 years if you go back from the first week of August, and certainly at some point it has been exactly 945%, I just don’t know which day he used for his calculations.

And yes, at this point probably pretty much every medical student has touched a Stryker product during their training — those who train in orthopedics or neurosurgery are perhaps most tied to Stryker or most likely to recognize the brand in stuff like the Stryker Saw and their hip and knee implants, but they also sell tons of other less-specialized hospital equipment with a variety of brand names, from endoscopes to hospital beds.

Will it be inflation-resistant? Well, probably, most healthcare stuff seems to be. The market has exploded for Stryker in recent years, particularly as the baby boom generation entered their knee and hip replacement years, so perhaps things will slow down a little bit once it’s the smaller group of my gen-X cohorts in the healthcare spotlight… but that’s years off, the boomers are really still in their prime orthopedic consumption years, and Stryker has also pretty meaningful diversified (as has probably their most substantial competitor, Zimmer Biomet (ZBH)).

Right now, they’re doing very well. Their return over the past 20 years has been wildly better than somewhat-comparable med-tech companies Medtronic or Zimmer Biomet (whose 20-year returns are more like 200%), and they’ve even pretty nicely beaten the S&P 500 over that time period (the S&P is up about 650%). The stock is trading at a pretty high multiple of about 25X trailing earnings (21X 2023 earnings estimates), and they have had times in the past when earnings contracted for a brief while, but overall the business has been a steady grower. Their only down year in revenues was 2020, and it wasn’t down much compared to other surgery-related companies that suffered because of the pandemic shutdown (when all focus turned to COVID, a lot of knee and hip replacements were postponed). I expect they’re probably still not back to their full earnings power right now, given some challenges in the supply chain for their products and the fact that hospitals continue to be under some COVID pressure (though that’s been getting steadily better since the Omicron outbreaks in the first quarter).

So… longtime dividend growth company, with the dividend increasing at better than the rate of inflation, so that’s good. The average dividend growth rate of 12% is not spectacular, but it is a whisker over the S&P 500 dividend growth rate over that time, so they’re at least average for a large company. Their end markets should be growing pretty nicely right now, for demographic reasons if nothing else, and they have also expanded globally to a substantial degree. Analysts expect them to grow their earnings by an average of about 8% a year over the next few years, which strikes me as somewhat conservative given that their revenue growth has typically averaged out in the 6-9% range for many years and their profit margins will probably improve pretty meaningfully this year and next as “elective” surgery volumes recover from COVID… but if those analysts are right, then paying 21X earnings for a company that’s only growing earnings at 8% a year is a little pricey.

Buying a better-than-average company at a slightly-higher-than-average valuation is a reasonable way to go through life, owning a high-quality leader over the long run has often worked out much better than owning the second-place player that you can sometimes buy cheaper (like Zimmer Biomet in this case, for example), but if you pay a premium price you generally do have to be willing to be more patient. Stryker has trailed the S&P 500 over the past five years, and I’d argue that’s mostly because of COVID, which put a huge dent in their free cash flow and earnings in 2020. It would not be at all surprising if they begin to make up for that over the next five years.

The only real stumbling block I’d see with Stryker, financially speaking, is that the stock has really outgrown its earnings over the past decade (if there’s a scary skeleton in their closet, like the kickback scandals in the orthopedic/medical device market that seemed to bring everyone down around 2010, I don’t know about it). In retrospect, that’s probably because stock was also too cheap a decade ago, given the scandals at the time and the timid market after the 2009 crash. Still, their 10-year growth in earnings and cash flow is meaningfully better than their nearest competitors, and that probably deserves the premium multiple they carry. Stryker has benefitted from multiple expansion over the past decade, but so have most successful growth companies, and the current valuation, using either PE ratio or Price/Free Cash Flow, is pretty average for the company over the past 20 years.

And with that, dear friends, I’ll leave the decision in your capable hands. Interested in a leading medical device and equipment company that has a long history of earnings and dividend growth but does trade at a little premium to the market? Have reasons to like or dislike Stryker specifically? Let us know with a comment below. Thanks for reading!

P.S. If you missed our story about the launch of Prosperity Investor, including solutions to a half-dozen other healthcare stocks he teased at the time, just click here for that July article.