Medtronic Allocates $5 Billion For Share Buybacks

Medtronic says that it will use $5 billion to repurchase shares over the next two years, as part of its capital allocation plan for the $9.3 billion cash the company freed up from an internal restructuring related to its acquisition of Covidien. The rest of the money will be used to repay outstanding debt.

"Today, the company announced that it intends to return $5 billion of the $9.3 billion to its shareholders through share repurchases to be executed before the end of fiscal year 2018," according to the announcement. "This $5 billion return to shareholders is in addition to the company's current commitment of returning 50 percent of its free cash flow each year to shareholders in the form of dividends and share repurchases."

"With this increased financial flexibility and within its ongoing commitment to return a minimum of 50 percent of free cash flow to shareholders in the form of dividends and share repurchases, the company has the ability to meet its targeted dividend payout ratio of 40 percent faster than previously communicated. Decisions on annual dividend payments are typically announced by the company in June," writes the company, which touted that it has increased its dividend payment for 38 consecutive years.

Medtronic says the balance will be used to either prepay existing debt or pay debt as it comes due by the end of fiscal year 2018.

Moody’s Investors Service praised the debt retirement plan, according to the Star Tribune, but says Medtronic needs to pay debts even faster if the company wants to get its coveted "A" credit rating, because currency headwinds are greater than when it purchased Covidien.

"This news is credit positive for Medtronic because the company intends to use a portion of this cash toward debt repayment, which will help with its deleveraging plans. However, in light of other offsets, there is no change to Medtronic's rating or outlook at this time," writes Moody's.

After closing the Covidien deal in January 2015, Medtronic executed an internal restructuring in September 2015 to tap the approximately $9.3 billion of cash, cash equivalents, and investments in marketable debt and equity securities held by its overseas subsidiaries. Back then, Medtronic had said the cash would be spent for "general corporate purposes."

Details of the capital allocation plan were hinted at by Medtronic CEO Omar Ishrak at an earnings call last month; he told investors that share buybacks and accelerated debt repayments are priority actions. The resulting financial flexibility will give Medtronic – which has been active in M&D deals in recent months – will give the company even more funds for acquisitions.

The company says that the capital allocation moves will not impact Medtronic's fiscal year 2016 income statement, but will be accretive to earnings the following year. Related, the company projects "upper-half of its mid-single digit revenue growth" for second-half fiscal year 2016.