After Blowout Earnings, This Dividend Stock Still Looks Cheap

For investors who might be growing a little uneasy with the stock market's tumultuous ride, dividend stocks stand out as a beacon of relative stability amid the ongoing market volatility. The best dividend stocks offer not only steady earnings growth but also a recurring income stream, positioning them as an ideal choice for investors seeking steady passive income.

One such example is ResMed Inc. (RMD), a notable contender in the rapidly expanding sleep and respiratory devices industry. The medical equipment company, which has been steadily increasing dividends for the past 11 years, last month reported blowout earnings, underscoring its robust growth trajectory. Following this news, ResMed shares saw their biggest one-day surge since March 2020.

Despite the stock's recent rally, ResMed's shares still seem undervalued compared to its historical averages. This suggests an enticing opportunity for dividend enthusiasts. Given the burgeoning sleep and respiratory devices industry and ResMed's commanding presence within it, coupled with its solid financial standing, let’s take a closer look at the stock.

About ResMed Stock

Founded in 1989, San Diego-based ResMed Inc.’s (RMD) products treat sleep apnea, COPD (chronic obstructive pulmonary disease), and other respiratory issues. Lately, the company has been delving into tech and software, splitting its operations into Sleep and Respiratory Care and Software as a Service (SaaS) segments. Its market cap currently stands at $31.9 billion.

Shares of ResMed have surged 25.6% on a YTD basis, surpassing the broader S&P 500 Index’s ($SPX)gain of 8.7% and the S&P 500 Healthcare Sector SPDR’s (XLV)modest 4.1% returns over the same time frame.

On April 25, ResMed declared a quarterly dividend of $0.48 per share, payable to its shareholders on June 13. The company’s annualized dividend of $1.92 translates to a 0.89% dividend yield. Moreover, by maintaining a modest payout ratio of 25.9%, the company prioritizes channeling its earnings toward growth initiatives, thereby ensuring resources for future investments.

Priced at 28.74 times forward earnings and 7.55 times sales, the stock trades at a discount to its own five-year averages of 35.15x and 8.57x, respectively.

ResMed’s Strong Q3 Beats Wall Street Projections

On April 26, shares of ResMed rose an impressive 18.9% after the company reported its Q3 earnings results the night before, which surpassed Wall Street’s projections on both the top and bottom lines. Its total revenue of $1.2 billion rose 7% annually, exceeding Wall Street’s estimates by 2.1%. Meanwhile, its non-GAAP EPS jumped 27% year over year to $2.13 per share, topping analysts’ estimates by about 10.9%.

ResMed's profit surged on the back of robust demand for its medical devices and software, particularly its sleep devices, with double-digit revenue growth in masks and accessories. Additionally, improving margins, driven by lower freight and manufacturing costs, bolstered its profitability.

During the quarter, the company paid $70 million in dividends and repurchased 261,000 shares for $50 million as part of its ongoing capital management.

ResMed rolled out the AirCurve 11 series, upgrading the AirSense 11 platform with bi-level and improved ventilation therapy choices. It also introduced the AirFit F40 in the U.S., a compact full-face mask with innovative features for better sleep.

Analysts tracking ResMed expect the company’s profit to reach $7.59 per share in fiscal 2024, up 17.9% year over year, and grow another 13% to $8.58 per share in fiscal 2025. 

What Do Analysts Expect for ResMed Stock?

ResMed stock has a consensus “Moderate Buy” rating. Out of the 14 analysts offering recommendations, eight advise a “Strong Buy,” two suggest a “Moderate Buy,” and the remaining four give a “Hold” rating. 

Even though the stock trades above the average analyst price target of $212.30, the Street-high price target of $238, reiterated by KeyBanc after earnings, suggests a 9.7% upside potential.