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Smith & Nephew: are shares in this FTSE 100 company a buy?

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The medical device industry – often seen as the poor relation of the pharmaceuticals and healthcare space – suffered in 2020. Elective routine surgical procedures took a back seat for most of last year, but now that the Covid-19 vaccine programme is gaining pace, things are looking up for one FTSE 100 company.

The share price for Smith & Nephew (LSE: SN) has grown 15% over the last six weeks alone, and still has some way to go, if its pre-pandemic stock valuation is anything to go by. This, together with the fact that the company has never yet failed to pay out a dividend since it was first listed back in the 1930s, leads me to give it serious consideration as an addition to my investment portfolio.        

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Smith & Nephew operates across three segments – orthopaedics, sports medicine and ENT (ear, nose, and throat), and advanced wound management, and while the company is not a leader in any of these, it is in the top three across the board. Geographically, Smith & Nephew draws most of its business from the US (50%) and Europe (20%). Back in 2019, the stock of this FTSE 100 company was showing real momentum on the back of overcoming some fairly tortuous changes in personnel and leadership, and the growing pains that come from inorganic growth. But then the pandemic happened, and revenue growth for the whole year hit a wall.

Smith & Nephew’s Q1 sales call, however, was tentatively positive. Revenues were up in Q1 2021 across all three franchise segments, driven by a genuine increase in surgical volumes, and totalled $1.3 billion, representing 6.3% underlying revenue growth. Within orthopaedics, hip options were consistently the most resilient to Covid-19, likely owing to such procedures being more challenging to delay. Sports medicine has shown the most rapid recovery, ascribed to a combination of the outpatient setting, younger patient mix, and the acute nature of the injuries, rendering such procedures the most amenable to this period of Covid-19 transition.

This FTSE 100 company expects Q1 trends to pick up through the year, and lead to a 10-13% growth in 2021 revenues, with the majority of growth organic. The outlook assumes no Covid-19 constraints on surgical procedures in H2 2021, and in many ways is predicated on the incumbent health-care systems being sufficiently able tooled up to deal with pent-up demand. Early indications point to faster normalisation being likely in the highly decentralised US, with the more centralised healthcare systems of Europe slower to respond.

Smith & Nephew also needs to execute on the successful integration of recent acquisitions. In January 2020, the company acquired Tusker Medical Inc. which bought with it an ENT system (Tula), the launch of which was considerably impacted by the pandemic. More recently, Smith & Nephew acquired the Extremity Orthopaedics business from Integra LifeSciences Holdings Corporation for $240M. Despite the downturn of last year, Smith & Nephew has continued to invest in R&D, and has a number of home-grown launches to roll-out, in what remains a challenging environment where stakeholder engagement opportunities remain limited.

Overall, Smith & Nephew is a FTSE 100 company that I’m inclined to invest in as I believe the share price has room for growth, and the dividend return is reliable. 2020 was the first year in many where the dividend was flat rather than growing, but my expectation is that dividend growth will return.

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Pam Narang owns no shares in any company mentioned. 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.

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