Like many big health care companies, Medtronic PLC has taken on a lot of additional debt in a bid to transform itself into the medical device company of the future. But a new analysis shows the strategy comes with risks.

Carrying high debt leaves merging companies a thin cushion to absorb setbacks like litigation or unexpected integration expenses, exposing investors to potential cuts in earnings. A new analysis from Moody’s Investors Service says Medtronic has prolonged the risks by slowing down debt payments to push out profits to shareholders in dividends and share buybacks.

“Compared to the other companies, Medtronic’s debt repayment will be the most constrained by shareholder payouts,” analysts at Moody’s Investors Service wrote in a report last week on six health care companies in the process of executing “transformational” mergers and acquisitions.

Medtronic may disclose more about its plans for dividends and debt Tuesday, when it announces regular quarterly earnings. The company didn’t comment for this story.

Medtronic became the world’s largest maker of medical devices in late January with a $49.9 billion stock-and-cash acquisition of hospital supplier Covidien.

Medtronic borrowed heavily in U.S. debt markets to fund the deal. As a result, its total debt will balloon to $36.9 billion this year, from $11.9 billion in 2014, according to a financial model published by JPMorgan Chase.

Moody’s last year downgraded Medtronic’s credit outlook to “negative” because of concerns over the high ratio of debt to projected earnings growth.

The report from Moody’s said Medtronic is one of six big health care companies with deals in the works that will raise their adjusted debt levels to four times earnings before interest, taxes, depreciation and amortization, or EBITDA. The report also looked at the proposed $13 billion acquisition of Biomet by orthopedic-device maker Zimmer, and the $12 billion acquisition of CareFusion by health care device supplier Becton Dickinson, and the $66 billion acquisition Botox maker Allergan by generic drugmaker Actavis, among others.

Others observers aren’t alarmed. A Feb. 11 Morgan Stanley analysis of Medtronic includes the company’s substantial cash reserves outside the U.S., and concludes Medtronic “can comfortably reach its leverage targets.”


Twitter: @_JoeCarlson