I consider shares offering passive income, via dividend payments, a core part of my diverse portfolio, providing me with a regular and predictable source of revenue without expending time and effort. This is especially true at the moment as UK inflation runs at rates not seen in three decades.
Right now, medical device manufacturer Smith & Nephew (LSE:SN) looks like a good buy for my portfolio, not only because it has an attractive passive-income offering, but because it has plenty of upside potential.
While the 2.37% dividend yield currently on offer can be beaten by other FTSE 100 companies, Smith & Nephew has a great track record for paying its shareholders.
The London-headquartered firm has also maintained a healthy dividend coverage ratio in recent years. Smith & Nephew’s dividend coverage ratio was 2.16 in 2021, meaning the firm could pay the stated dividend more than two times from its net income.
But what makes Smith & Nephew even more attractive to me is its current share price. As I write, the medical device giant’s share price is lingering around 1,190p, considerably discounted from a year-high of 1,592p in July 2021. Prior to the Covid-19 pandemic, the share price threatened to push above 2,000p for the first time.
There’s no doubt that the last couple of years have been difficult for the device manufacturer, and its current share price reflects that. Peers in the industry, including sector leader Medtronic, have also endured a tough two years.
The pandemic hit the medical device industry hard, with millions of elective procedures cancelled or delayed as healthcare providers and systems such as the NHS reallocated resources towards Covid-19 treatment and vaccine rollout. Supply chain disruption also hammered commercial operations.
Despite the tough operating environment, Smith & Nephew still returned a profit in 2020 and 2021, albeit far below pre-pandemic levels. In 2021, the device manufacturer posted a pre-tax profit of £586m, more than double the previous year despite record Covid-induced hospitalisations in the first quarter of the year and the emergence of the Omicron variant in the fourth quarter.
While there’s ongoing risk that new Covid-19 variants may emerge and dampen growth prospects for the medical equipment sector, I feel confident that 2022 will be considerably more prosperous for Smith & Nephew.
There are now more than six million people in England alone waiting on elective procedures, many of which were delayed because of the pandemic. What’s more, there is considerable political will to reduce the waiting list.
For me, this is why Smith & Nephew looks like a great buy right now. I already have a limited number of shares in my Self-Invested Personal Pension, but the stable dividend yield and upside potential mean I’ll be adding the device manufacturer to my Fund and Share Account in the near future.
James Fox owns shares 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.
