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By Mark Bern

Covidien PLC (COV) was spun off from Tyco (TYC) in 2007 and was formerly named Tyco Healthcare while operating as a wholly-owned subsidiary of the conglomerate. The company has three primary segments: medical devices, pharmaceuticals, and medical supplies. The big news is that the company is spinning off the pharmaceutical segment. This decision will probably not become reality until 2013, but when it does it should leave the remaining segments with better margins and a higher growth rate. Additionally, the company should have less exposure to healthcare reform efforts.

COV has increased the earnings per share in all but one year since becoming independent from Tyco. Dividends have also been increased beginning with the second year after being offered. While the history is very short it is also encouraging just the same. The most recent dividend increase came on September 22, 2011 and amounted to 13%.

The pipeline of new treatments holds good promise for continued growth. The company recently established a research center in China to help meet healthcare needs in that country. Overall, the company derives 45% of its revenue from outside the U.S. and is well-positioned to take advantage of the economic arrival of hundreds of millions of new middle class consumers in emerging markets.

The debt to capital ratio is just 28% and the payout ratio is 20%. A growing cash position may mean acquisitions to bolster its two remaining segments and augment share earnings. But I seriously doubt that much will happen on that front until after the spinoff has been completed. A strong balance sheet lends additional flexibility for future acquisitions, if needed.

The current dividend yield is 2.0% and the stock’s price is $45.99 (as of the market close on January 9, 2012). Assuming that growth rates for earnings and dividends continue in the 9% range the company should support a forward P/E ratio of 13 or better. The current P/E is 12.2 on a trailing twelve month basis. The stock is not terribly undervalued at the time, but should hit $56 by the end of 2012. The growth rate would imply a 5-year price target of $75 and average total annual return of about 14%.

Nothing too exciting, a short history as a stand-alone company and a meaningful transformation is in the works. This may not be appropriate as a core investment for a conservative dividend investor. The dividends are likely to rise, but I would consider this one as more of a satellite portfolio holding with growth prospects. My idea of a satellite portfolio a tradable position intended as a place to hold assets that is better than cash while waiting for a bargain price on a potential core holding.

Source: The Search For Rising Dividends: Covidien PLC