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Covidien plc. (COV - Analyst Report), a leading health care products company, recently announced a 16% hike in its quarterly dividend to 26 cents from the prior payout of 22.5 cents. This raises the annual dividend to $1.04 per share from 90 cents per share. The revised quarterly dividend is payable on November 5, 2012, to shareholders of record as on October 11, 2012.

The dividend hike reflects Covidien’s commitment to deliver incremental returns to investors leveraging a solid free cash flow and strong earnings. The company’s previous dividend increase was in October 2011, when it raised the quarterly payout by 12.5% to 22.5 cents a share from 20 cents.

Recently, Covidien raised its commitment to return more than 50% of its free cash flow (earlier 25% — 40%) to its shareholders via dividends and share repurchases. In the last one year, the company has returned almost 83% of its free cash flow to its shareholders, which is well above the targeted value.

Covidien has a strong liquidity position to support the dividend increase as well as the higher payout ratio. The company ended the third quarter of fiscal 2012 with cash and cash equivalents of $1,935 million. It also generated $1,637 million in cash from operations in the last nine months.

Covidien continues to maintain a streak of positive earnings surprises having beaten the Zacks Consensus Estimate in each of the last four quarters. The company reported third quarter 2012 earnings of $1.07 per share, ahead of the Zacks Consensus Estimate by a penny. Results inched up 5.9% from the prior-year quarter earnings of $1.01 per share. Total revenue was $3,007 million, improving 3% year over year but missing the Zacks Consensus Estimate of $3,012 million.

Recently, Covidien provided its financial outlook for fiscal 2013. It expects net revenues to grow by 3% to 6% year over year for fiscal 2013. The Zacks Consensus Estimate for EPS and revenues is $4.46 and $12.3 billion, respectively.

Covidien remains committed to rolling out new products and technologies, focusing on emerging markets, and boosting market share in core segments through investments in sales and marketing infrastructure. Management expects that focus on product innovation; aggressive portfolio management and optimal spending on future investments will yield positive results in the long run.

However, sustained pricing/procedure volume pressure, fluctuating foreign exchange rates, a sluggish U.S. and European economy represent major headwinds.  We currently have a Neutral recommendation on Covidien, which carries a short-term Zacks #3 Rank (Hold rating).

Covidien is a leading developer, manufacturer and distributor of medical devices and services on a global scale. Its business segments overlap with the business of its competitors such as Becton, Dickinson and Company (BDX - Analyst Report), Johnson and Johnson (JNJ - Analyst Report) and CR Bard Inc. (BCR - Analyst Report) among others.
 

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