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Stryker’s Adoption of Robotics and 3D Printing

September 6. 2019. 7 mins read

As the Nanalyze brand continues to grow, so do the number of emails we receive on any given day. From the interesting schizophrenics that email us, to the uninteresting public relations people that think we’ll drop everything and write about their paying clients for free, people email us with all kinds of different questions. One commonly asked question is what stocks we invest in ourselves. We’ve talked before about how the lion’s share of our personal investments are tied up in a dividend growth investing strategy that rewards those companies which have not only paid but increased dividend payments for a long period of time.

Dividend Growth Champions

They say that any entrepreneur should be able to explain their business model to a nine-year old over the duration of a 30-second elevator ride. The ability to simplify what your business does and explain it quickly shows you truly understand your value proposition. The same holds true for investing strategies. Here’s a quick explanation of Dividend Growth Investing (DGI).

When you buy a 10-year bond, you receive a fixed income stream over ten years which decreases in value because of inflation. In other words, a 3% yearly inflation in the cost of goods means a dollar today is worth only 74 cents in 10 years’ time. If you are retired and receiving a fixed income stream, this means your quality of life decreases over time. On the other hand, what if that income stream increased over time at a rate that exceeds inflation? Your quality of life increases over time instead. That’s what a DGI strategy is all about.

A DGI strategy considers companies with a track record of increasing dividends over time. How much time? A rule of thumb is to consider companies that have not only paid a dividend but increased it for at least 25 years in a row. Such companies are called “dividend champions.” Today, we’re going to talk about a dividend champion named Stryker (SYK).

About Stryker (SYK)

Click for company websiteStryker is an $82 billion medical device company based out of Michigan that’s been operating since 1941 in three main areas: Orthopedics, Medical and Surgical (MedSurg), and Neurotechnology and Spine. Looking at their latest 10-Q shows a company that’s well diversified across product lines which reduces risk and volatility in much the same way investors do by holding many stocks instead of just one.

 Stryker's Q2-2019 10-Q breakdown of revenues
Credit: Stryker’s Q2-2019 10-Q

It’s a diverse portfolio of businesses that can be added to or discarded as the company sees fit. It’s impressive to see growth in every single category year-on-year with knee and hip replacements likely to benefit from the coming increase in longevity. When it comes to profitability, Stryker has managed to generate loads of cash, some of which has been returned to shareholders in the form of dividends. In the past 10 years, the dividend paid to shareholders has grown at an astounding 22% per year. To put that into perspective, if you bought shares in Stryker 10 years ago, they would now be paying you almost 7% in yield based on your initial purchase price (also referred to as yield-on-cost), while your investment would have grown over +440% compared to a Nasdaq return of just over +300% over the same time frame. While past performance is no indicator of future results, this track record shows that Stryker’s management can execute consistently over time, even in times of turmoil.

While the medical experts at Stryker are most suited to determine what this medical device product portfolio ought to include, we’re interested in looking at what sort of disruptive technologies the company is dabbling in that will fuel the incredibly strong dividend growth that Stryker has managed to accomplish over the years.

Robotics and 3D Printing

Stryker is committed to advancing their use of disruptive technologies as their latest investor deck cites “significant investments in R&D driving industry leadership in many areas (e.g., robotics, 3-D printing, and advanced imaging).” These are all high-growth areas that will fuel tomorrow’s dividend raises. We’ve talked before about the proliferation of robotic surgery devices and how companies like Johnson & Johnson (JNJ) (another great DGI stock to own, even with their opioid problem) are making acquisitions in this space. About six years ago, Stryker acquired a company called Mako Robotics for nearly $1.65 billion, just one of many acquisitions they’ve been making over the years.

Stryker's acquisition timeline
Credit: Stryker Investor Deck

An article by MedCity News a few years back talked about how Stryker “is launching its Triathlon total knee on its Mako robotic system, reportedly priced at $1 million” and that some analyst thinks that “surgeons expect Stryker’s Mako to capture ~90% of the U.S. robotic hip/knee market.” This means we ought to watch the “knees” revenue segment start experiencing some significant growth. From 2017 to 2018, that segment grew 6.6% which isn’t the sort of double-digit growth you might expect. In the Q2-2019 earnings call, the word Mako was mentioned 31 times with Stryker making some key points about adoption as follows:

In Q2, we sold 44 Mako robots globally with 35 in the US. By comparison in the comparable quarter a year ago, we installed a total of 39 robots of which 29 were in the US. Globally, our installed base of robots is north of 700, with close to 600 in the US. Looking at US procedures, in Q2, Mako total knee procedures exceeded 18,000, increasing approximately 80% from the prior year quarter, while total Mako procedures approximated 27,000.

Great to see some robots are getting sold then. Additionally, Stryker announced another robotics acquisition just days ago – Cardan Robotics and its sister company Mobius Imaging. Another great article by MedCity News talks about how the acquisition “significantly bolsters the company’s robotic and navigation expertise, something we continue to view as the future of spine surgery.” The article goes on to talk about how the acquisition may put Stryker in a better position to challenge Medtronic with an estimated 28% share of the global spine market (Stryker is said to be in fourth place with an 11% market share). Turns out Medtronic is another DGI stock we’ve talked about before that also made news with their acquisition of Mazor Robotics last year.

Then, there’s 3D printing which Stryker moved into with last year’s acquisition of K2M which helped them “rapidly become a leader in 3D printed titanium implants.” That’s according to a great article published in June of this year by 3D Printing Industry which talks about how Stryker now commands “the world’s largest additive manufacturing facility for orthopaedic implants,” with upwards of 300,000 implants having been conducted so far using a biocompatible titanium additive manufacturing material that “exceeds the cell in-growth rate of other implants made through conventional methods of manufacturing.”

Stryker’s capital allocation strategy shows how acquisitions such as Mako Robotics, Cardan Robotics, and K2M are all part of the companies plan to consistently add growth companies to their portfolio that will fuel future dividend increases.

Stryker's capital deployment strategy
Credit: Stryker Investor Deck

We can see how dividends are a small part of their capital deployment strategy which may turn off some income investors. Here’s why it shouldn’t.

Stryker’s Low Yield

Investors who purchase shares of a company for the dividends will often look at the yield. If you open an account with CIT Bank right now, they’ll pay you up to 2.30% yield on your cash. Put in $10,000 and in one year’s time, you’ll have $10,213. If you bought shares of Stryker instead, the yield you would receive today would be just under 1%. That’s horrible, right? Not if you consider dividend growth. Over the past 10 years, Stryker increased their dividend by 16.7% on average every year which means by the tenth year your yield-on-cost would be around 4.68%. The payout ratio (the amount of profits they give back to shareholders in the form of dividends) is low at 38% which means they have lots of leeway to increase the dividend. Couple that with their targeted 9% increase in earnings-per-share and things look quite bright for future dividend raises.

Stryker's financial goals
Credit: Stryker Investor Deck

And we haven’t even considered total return, largely because we hold DGI stocks with an indefinite time horizon unless the dividend growth lags dramatically or stops.

Conclusion

When you read about technologies like synthetic biology or machine learning you cannot help but get excited and want to invest in these themes. As we’ve seen time and time again, that’s not the greatest idea. Solar, 3D printing, synthetic biology – these are all themes that largely flopped right out of the gate. We usually attribute that to something called Gartner’s Hype Cycle – the idea that a technology will inevitably generate a great deal of hype long before it’s reached commercial maturity. Companies like Stryker let other people “fail fast” before stepping in and adopting disruptive technologies like robotics and 3D printing which they then use to establish market dominance after the kinks are worked out.

Since all we do is generate hype around companies involved in disruptive technologies, it becomes very tempting to dabble a bit and invest in some of these stories instead of sticking with tried-and-true strategies like DGI. That’s fine if you’re playing with a bit of the house’s money, but just remember the story of VHS and Betamax. No matter how disruptive you might think any given technology is, there could be another technology lurking in the shadows that’s even more disruptive.

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