There’s a lot of uncertainty in the global economy right now. So I’m keen to boost my exposure to more ‘defensive’ FTSE 100 stocks to protect my portfolio. Recently, I did that by buying more shares in Smith & Nephew (LSE: SN). Here’s a look at why I added to my holding.
Why I bought more of this stock
Smith & Nephew is a medical technology company that specialises in orthopaedics, sports medicine, and advanced wound management. A well-established company that has been listed on the London Stock Exchange since 1937, it has a good long-term track record and pays a dividend.
Now, Smith & Nephew has faced some challenges in recent years. As a result of Covid-19, demand for its orthopaedic products fell (elective surgeries were delayed). Ongoing lockdowns in China have also slowed the company’s recovery. Meanwhile, supply chain issues have also created problems.
I think the outlook is likely to improve from here however. The pandemic appears to be behind us and even China is now talking about reopening. This should set the company up for solid top-line growth as there’s a huge backlog globally for joint replacement surgery.
Solid Q3 results
It’s worth noting that Smith & Nephew’s recent Q3 results were solid. For the period, the group generated underlying growth of:
2.1% in Orthopaedics
7.1% in Sports Medicine and ENT
6% in Advanced Wound Management
These numbers suggest the company is on the right track. If it can continue to deliver, earnings should get a boost, and so should the share price (which has taken a big hit recently).
Long-term growth story
This is not just a short-term turnaround play however. What really appeals to me here is the growth potential in the long run.
You see, Smith & Nephew is poised to benefit from one of the most powerful trends on the planet today – the world’s ageing population. By 2030, one in six people across the world will be aged 60, or over. This should drive demand for the company’s joint replacement products higher.
As for the dividend, the yield here is currently quite attractive. Last year, the company paid out 37.5 cents (the company reports in US dollars) per share. At the current share price, that translates to a yield of around 3%.
It’s worth pointing out that Smith & Nephew is a very reliable dividend payer (it has paid a dividend every year since 1937). It also has a good long-term dividend growth track record, having increased its payout over the years.
Turning to the valuation, it’s quite undemanding. At present, analysts expect Smith & Nephew to generate earnings per share of 79.7 US cents this year and 85 US cents next year. That puts the P/E ratio at 15.7, falling to 14.7 using next year’s earnings estimate. I think that valuation is very reasonable.
Now, as always, there are risks here. I think the main one is further Covid lockdowns. These would most likely impact the company’s recovery.
Overall, however, I like the risk/reward proposition from here. I see a lot of appeal in this FTSE 100 dividend stock right now.
Edward Sheldon has positions in Smith & Nephew. The Motley Fool UK has recommended Smith & Nephew. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2022