A blue chip security that is a Buy It Now

Investors looking to build life-changing wealth should pay attention to stocks that may have outperformed broader markets over the medium term. Indeed, only the highest quality stocks tend to do so.

Large-Cap Medical Device Manufacturer stryker (SYK -2.79% ) Fits this bill, beating the return of the S&P500 index over the past five years. The stock is up 100% from the S&P 500’s 90% gains during that time. Stryker also looks set to outperform the S&P 500 for at least the next five years. Let’s look at three reasons why I think this is the case.

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1. Growth prospects remain intact

Stryker’s earnings results were mixed in the fourth quarter ended Dec. 31. The company beat analysts’ expectations for revenue in the quarter, but fell just short of their consensus for non-GAAP (adjusted) diluted earnings per share (EPS).

Despite the COVID-19 pandemic, Stryker has exceeded analysts’ revenue forecasts in six of the past eight quarters. Additionally, the company has exceeded analyst consensus for Adjusted EPS in five of the past eight quarters.

Stryker posted net sales of $4.70 billion in the fourth quarter, up 10.3% from a year earlier. That figure was slightly higher than the $4.65 billion in revenue analysts expected for the quarter. Organic sales growth gave Stryker a 9% boost to net sales in the fourth quarter despite disruptions to elective proceedings in December resulting from the omicron variant of COVID.

Revenue growth was driven by six product launches in 2021. This includes the T7 personal protection system for surgeons during surgical procedures and Stryker’s next-generation surgical sponge counting technology known as Surgi-Count+ safety sponge system.

Another 2.1% of Stryker’s net sales growth was due to the company’s acquisition of Wright Medical Group, which only closed in November 2020 – midway through the fourth quarter of 2020. Stryker’s organic sales growth and acquisition growth were partially offset by unfavorable currency translations, which weighed on revenue growth by 0.8%.

Stryker’s adjusted diluted EPS fell 3.6% year over year to $2.71 in the fourth quarter. That narrowly missed the analyst consensus of $2.72. Stryker’s narrow revenue loss can be explained by two factors. First, the company’s non-GAAP net margin fell 310 basis points year over year to 22% in the fourth quarter. Second, a 0.4% increase in diluted shares outstanding to 382.7 million reduced the amount of earnings generated by each share.

Stryker’s commitment to research and development should lead to more product launches in the future. That’s why analysts expect the company to post 11% annual earnings growth over the next five years. This would be essentially in line with annual earnings growth of 12% over the previous five years, which should translate into inflation crushing return potential for the stock.

2. A dividend with the possibility of growth

Another reason investors love Stryker is its dividend. The stock’s 1% dividend yield isn’t going to wow dividend investors. But it will likely be increased at a healthy pace for the foreseeable future.

Stryker’s dividend payout ratio in 2021 was just 27.7%. This gives the company the flexibility to hand out generous dividend increases, make add-on acquisitions, and pay down debt to boost profits.

Given the low double-digit annual earnings growth forecast for the next five years, I expect to see at least a similar rate of dividend growth during this period.

3. The valuation isn’t spectacular, but it’s reasonable

The final reason to consider buying Stryker is the stock’s valuation, which doesn’t seem excessive. Stryker is currently trading at a forward price-to-earnings (P/E) ratio of 24.4. This is moderately below the medical device industry average forward P/E ratio of 26.3, offsetting the fact that Stryker’s 11% annual earnings growth potential is below the industry average by 14%.

Stryker’s strong fundamentals and fair valuation make it likely that the stock will continue to beat the market.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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