The Motley Fool

Have £3k to spend? A surging FTSE 100 stock I’d buy right now

In this article I’m going to explain why I think Smith & Nephew’s (LSE: SN) a top stock for sensible investors to buy right now. In doing so I’ll consider four critical characteristics: its valuation, dividend policy, balance sheet, and its growth prospects in the near term and beyond.

Growth Story

Smith & Nephew’s one of the biggest players in the realm of artificial joints and limbs, advanced wound care, and has an increasing role in the world of surgical robotics.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Profits have been pressured more recently because of subdued demand in Smith & Nephew’s core US marketplace, and looking ahead, the trouble created by trade wars threatens some more stress across both its developed and emerging markets. This is why City analysts are expecting fractional bottom-line growth in 2019.

That said, I consider this Footsie share’s long-term growth outlook to be mightily compelling. In particular, a combination of exploding global population growth and rising healthcare spend in bright new markets like China promises to drive profits at this Footsie firm skywards in the years ahead. The number crunchers expect things to start rolling with annual earnings expansion revving to 7% in 2020.

Valuation

Now the medical giant certainly appears a tad expensive on paper, its shares trading on a forward P/E ratio of 22 times compared with the accepted value benchmark of 15 times and below. A high price has been created by Smith & Nephew’s electric price run over the past 12 months (it’s up 66% as I type) which leaves it trading at record highs.

Balance Sheet

It’s got plenty of financial firepower right now to keep growing dividends and to continue making earnings-boosting acquisitions as well. Cash conversion stood at a mighty 85% in 2018, whilst its net debt-to-adjusted EBITDA ratio stood at just 0.8 times.

And the business remains extremely proactive in putting that balance sheet to work by making some significant acquisitions. It made yet another move on this front earlier in July with the takeover of Switzerland’s Atracsys Sàrl, a maker of optical tracking technology that’s used in computer-assisted surgery.

Dividend Policy

The healthcare giant doesn’t have the most storied of dividend policies on the FTSE 100, however.

Firstly, its decision to freeze the full-year payout in 2016 means it doesn’t have the longest-running progressive policy out there. Secondly, dividends at Smith & Nephew haven’t exactly flown higher in recent times, the annual sum rising a mere 3% last year to 36 US cents per share.

And lastly, whilst Smith & Nephew’s expected to keep its recent run of dividend rises going — City analysts anticipate a payout of 38 US cents this year and 41 cents in 2020 — those chunky share price gains of the past year leave yields for these years sitting at 1.7% and 1.8% respectively.

It’s a buy!

It’s clear that, on paper at least, Smith & Nephew doesn’t provide an abundance of bang for your buck, either in terms of earnings multiple or dividend yield.

But there’s a reason why investors have been piling into the business en masse in recent months: its rising might in a white-hot medical segment and a resumption of brilliant profits growth in emerging regions. So forget about its high price, I say. I reckon this FTSE 100 favourite has all the tools to provide stunning returns in the years ahead.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.