With $9 billion in freed-up funds, Medtronic plans to spend $5 billion on share buybacks

Medtronic PLC announced a $5 billion share repurchase program Monday as part of a broader spending package for cash and investments freed up through the international acquisition of Covidien.

Chief executive Omar Ishrak told investors at the annual J.P. Morgan Healthcare Conference that the medical device company will buy back stock by the spring of 2018. Ishrak hinted in earnings calls last month that such an announcement would come soon as part of a $9.3 billion capital reallocation.

The company, which is run from corporate offices in Minnesota, intends to repurchase the shares sooner rather than later, according to a statement issued as Ishrak spoke at the conference in San Francisco.

"This $5 billion return to shareholders is in addition to the company's current commitment of returning 50 percent of its free cash flow each year to shareholders in the form of dividends and share repurchases," the statement said.

"The company has the ability to meet its targeted dividend payout ratio of 40 percent faster than previously communicated. Decisions on annual dividend payments are typically announced by the company in June," the statement said. "Medtronic is a constituent of the S&P 500 Dividend Aristocrats index and has increased its dividend payment for 38 consecutive years."

The $9.3 billion was freed up through internal reorganizations after Medtronic's $49.9 billion acquisition of medical and surgical supplier Covidien, which was based in Dublin, Ireland.

Medtronic moved its legal headquarters to Ireland, then executed internal transactions that resulted in money previously held in overseas operations "being made available" for general corporate purposes.

After taxes, that money amounted to $9.3 billion.

"The reorganization provided Medtronic with additional financial flexibility and increased confidence in the company's ability to meet its financial commitments," the statement said.

After $5 billion is spent on share repurchases, most of the remainder will go to prepaying existing debt or paying down debts as they come due through the end of fiscal 2018, which would end in April of that calendar year.

Medtronic is targeting an "A" credit profile with bond analysts.

Bond analysts with Moody's Investors Service praised the debt-retirement plan. But they said Medtronic would have to pay down its debts even faster to achieve a credit upgrade, because negative currency impacts have been more severe than executives planned for when the Covidien acquisition was completed.

"This news is credit positive for Medtronic because the company intends to use a portion of this cash toward debt repayment, which will help with its deleveraging plans," Moody's wrote to bondholders. "However, in light of other offsets, there is no change to Medtronic's rating or outlook at this time."

The spending announced Monday is not expected to materially affect Medtronic's income and earnings projections through this fiscal year, ending in April. However, executives are expecting the decisions will add to earnings in the new fiscal year.

Also Monday, Medtronic announced that enactment of the federal R & D tax credit by Congress had improved the lower range of its earnings guidance for the current fiscal year by three cents per share, to $4.36 to $4.40 a share.

Medtronic reiterated that it expects sales in the second half of its fiscal year to be at the high-end of its previous forecast, which was for mid-single percentage growth on a constant-currency basis.

Joe Carlson • 612-673-4779

Twitter: @_JoeCarlson