After two years of correction and downtrend, providing ample incentive to buyers all along the way, medical device maker Medtronic (NYSE: MDT) has finally reached its bottom, and the reversal is on. The Q2 results confirm normalization in the wake of the COVID bubble and a solid trajectory for growth that is nearly irresistible for value-minded income investors.

Growth isn't expected to be robust for this medtech stock but to continue at a pace sufficient to sustain share price value, the dividend, and distribution growth outlook, which is substantial. The question is whether this reversal will complete and turn into a rally or the market will become range-bound at its current levels.

Medtronic had a steady quarter, margin impressed

Medtronic had a solid and steady quarter with revenue growth in all segments and geos. The company reported $8 billion in net revenue for a gain of 5.4%, led by the Diabetes segment. Sales of Diabetic supplies rose nearly 9.7% as reported, about 6% FX-neutral, followed by a 7% gain in Medical Surgical, 5.9% in Cardio and 4.7% in Neurology. 

All segments are supported by normalizing procedure volume and product innovation. Diabetic supplies were surprisingly strong given the rise of new weight control drugs but underpinned by the first full quarter of sales for the MiniMed units in the US. 

The margin news is mixed but favorable to shareholders. The GAAP net income and EPS improved more than 100% to over $900 million while adjusted income contracted. However, adjusted income outpaced the consensus estimate by 500 basis points, and FX headwinds offset the rest. The $0.08 FX headwind is worth 650 basis points in earnings, or enough to produce growth compared to last year. Regardless, the strength led to improved guidance, and both are helping to lift the stock price. 

Dividend health helps lift the Medtronic market

The guidance adjustment is slim but raises the midpoint for revenue and earnings above the consensus, with analysts adjusting their outlook for both. The takeaway is that earnings are expected to hold steady with a slight contraction this year and to resume growth next, more than offsetting this year's weakness and keeping the dividend health in good condition. 

Medtronic pays a healthy 3.6% yield with shares near $77.75. That's near the highest level the company has paid historically, and it comes at a discount to recent valuations, which is also substantial. 

The dividend payout ratio is near 50% of adjusted earnings, and the balance sheet is in good shape, with debt low and well-managed. Net debt is less than half of shareholder equity, about 25% of asset value, and distribution coverage is high, so the risk is minimal. With earnings expected to grow in 2024 and new product launches to sustain growth, dividend safety will improve for this high-yielding Dividend Aristocrat. 

Medtronic trades below fair value

Medtronic stock is trading in alignment with peers, about 15X for most and a discount to leaders like Abbott Laboratories (NYSE: ABT) and Stryker (NYSE: SYK). Still, it pays the highest yield of the group while trading below fair value pricing. Fair value can be determined in many ways, including the analysts' consensus target, which is above the current price action. 

In this case, the analysts tracked by Marketbeat.com view this stock as a deep value because it trades below their price target range, about 2.5% at the low end and nearly 18% below the average. 

The price action in MDT moved to deep-value levels before the Q2 release and began to rebound the week before. Now, the rebound is gaining traction and confirming support at the critical $72.50 level. The rebound will likely continue, but the next hurdle is near $79.50 and may be tested soon. 

A move above $80 into the analysts' target range is likely if the market can get above that level. In this scenario, momentum will build, and the price action will continue up to the $90 level and analysts' consensus for fair value. If not, MDT shares could remain rangebound near current levels, but lower lows are not expected.