Recent Sell – Medtronic plc

Well, this was an unplanned sale and I was hoping to resolve this issue without having to sell the company. Normally, I firmly believe that investors should only invest in companies if they want to hold it forever. Renting stocks for the short run, looking for capital gains isnt the best way to invest and it has been demonstrated time and again, that traders get burned while trying to time the market. While this transaction of selling my position was not to lock in capital gains and trying to time the market, the resulting byproduct sure does seem that way. This transaction was mainly influenced to make my life easier over the course of years concerning dividend taxes.

After a few back-and-forth emails with my discount broker, I decided to sell my position in Medtronic plc (MDT). There is nothing really wrong with the company – and I really like the long term prospects. Medtronic is definitely one of the best run companies when it comes to medical devices and the cardiac/vascular group. Read my post from Sep 2013 when I initiated the position. The facts and the reasoning behind owning still stands – if you are interested in investing in this great company.

Recent Sell Decision

  • Medtronic bought Covidien plc and decided to invert into an Ireland-based company. Although this resulted in a nice bump in the stock price, this resulted in a tax on my portfolio.
  • My dividends from Medtronic resulted in a 20% withholding dividend tax, even though I am not supposed to be taxed (since Canada belongs to the “relevant territory” in this list). After some back-and-forth with my discount broker, this was the response I got:

In order for us to apply the favourable (0%) with-holding for this dividend, we need to provide client information to the Irish government. As we will not disclose any client information, we receive the unfavourable (20%) rate. The client will need to claim a refund on non-resident withholding tax through the Irish government.

  • So, even though I like the company and I think it will do great over the coming years, it did not make sense for me to take the 20% cut in dividends unless I deal with more complicated tax paperwork at the end of the year. By selling this position, I make my life easier and hopefully my investment dollars will find a better home.
  • The good news is that I was able to sell and lock in my gains – even though that wasn’t the intention. Over the course of owning this company for 1 year and 8 months, I saw a neat 46% gain including dividends. I suppose, I have to take refuge in the old saying – “No one ever went broke taking a profit”.

Stock Summary:

  • Company: Medtronic plc (MDT)
  • Quote: $75.90
  • 52-week range: $58.25 – $79.50
  • P/E: 24.33
  • P/B: 3.7
  • Yield: 1.6%
  • Dividend Growth: 37 Years
  • 5-yr Dividend Growth Rate: 8.3%

Full Disclosure: My full list of holdings is available here.

47 thoughts on “Recent Sell – Medtronic plc

  1. Hey R2R. Do what you gotta do bud. You know whats best for yourself. The capital can be deployed for a high quality company as well so no big deal. Hopefully you’ll get a better yield than 1.6. Thanks for sharing my friend. Take care.

    • The stock is quite expensive currently…so I guess its not such a bad thing to take some profit at the moment. It is really annoying that I have to deal with complicated tax paperwork if I need to invest in overseas companies.

      Thanks for stopping by
      R2R

  2. Hi R2R

    The situation you are explaining sounds familiar to me. I have had similar issues, but with Canadian stocks held in a tax-deferred US account.

    I think if the Canadian tax laws say that they should not have taxes withheld, per Canadian/Irish tax agreement, then your broker is possibly in violation of the laws. So they deserve to be fined a lot of money.

    Either way, I was wondering, is it possible to maybe switch brokers? I am sure some have better systems/processes in place, to make sure they comply with laws.

    • DGI,
      Thanks for sharing your thoughts. Im not sure if they are breaking the law – they seem to be passing on the buck to me – saying that I need to deal with the Irish gov myself. They might be, who knows..I am not an expert in the tax laws, but chasing that down and trying to resolve it does not seem to be worth my time and effort. I have decided to close this issue for now and move on to make my life simpler. Hopefully, more people will raise these issues in the future and the brokers will have a proper plan.
      I have a good discount broker – where the trades are charged $4.95 – hard to find a deal like that elsewhere. The big banks are extremely expensive and lots of restrictions such as minimum balance, minimum activity per quarter etc, which makes them good as shareholders but not as customers.

      Thanks for the input. Appreciate the thoughts.
      R2R

    • Bernie says:

      DGI,

      If you hold Canadian stocks, other than REITs or income trusts, in your IRA you won’t have any withholding taxes to deal with. In Canada we have the same issues with U.S. withholding taxes unless we hold them in our RRSP (IRA equivalent). MLPs are another matter. They come with non-recoverable 35% withholding tax in ALL our accounts.

      I don’t know why Canada and the U.S. can’t get together and avoid all these silly border taxes altogether. This should be part of the free trade agreement!

      • Wish the tax-free savings account (TFSA) has the same arrangement as RRSP – no withholding taxes for US dividends – that would make the TFSA a clear winner…even though it already is, in my mind 🙂

        R2R

        • Bernie says:

          R2R,

          I agree! I suppose one could go with non or low dividend U.S. stocks. HST is another option if you want an index ETF of the whole U.S. market without the worry of dividends. I don’t really practice DGI in my TFSA anyway.

          • Yes, thats a good way to get US exposure – by owning Canadian listed ETF of the US market.

            Any particular reason why you don’t practice DGI in TFSA?
            R2R

          • Bernie says:

            R2R,

            It’s more an age thing. I’m 64 and retired but not distributing from my investments yet. For now my company pension with bridge to 65 and CPP are enough because my much younger wife is still working. I plan to tap into my RRSP @68 and TFSA around age 66. I have mostly growth stocks in my TFSA now but eventually want to hold several high yielding income stocks and bonds (~5% to 8% yield). My thought is to withdraw the tax free distributions for income then add all withdrawals back in plus the 10K allowable annually. The TFSA income should increase dramatically with this approach.

          • Sounds like quite a plan, Bernie. Thanks for sharing!

            I think about the withdrawals but just vaguely as I have no idea what life will be like in 30 years…but its definitely an interesting thought exercise. Good to hear that you are planning on leveraging the power of TFSAs over the years.

            Best wishes
            R2R

      • Hi Bernie,

        I had a broker in the US charge me taxes on dividends paid by Canadian banks in a tax-defferred/retirement account. This was in violation of the US-Canada treaty on dividends in retirement accounts. The taxes were withheld at source on two-three occasions, but later on it was fixed. The broker initial response was really maddening, because they were in effect stating that it was not worth their time and effort to get in compliance with the US -CDN treaty, because of cost or something to that extent. I can only hope they have invested sufficiently to ensure compliance with other regulations.

        The amount of money withheld was not worth fighting for – something like a few dollars of tax was withheld. But I have not done much business with this broker anymore, so it’s their loss.

        • Bernie says:

          DGI,

          Your brokers actions, or rather non-actions, are indeed maddening. It’s good you recognized this and acted to get your issue fixed. Unfortunately this broker is probably “screwing” others who don’t now any better. In my view if my broker doesn’t have the time for me I don’t have the time for them. I can’t complain about the service I’m getting now but it sure would be nice to get the cheap commissions R2R is getting.

          • I use Interactive Brokers exclusively these days. I would highly recommend it, though they are not suitable for people who have never invested, and who do not have $10,000 to their name and make less than 2 investments/month if they have less than $100K.

          • Ive heard really good things about IB. The only problem I have with opening an account with them is that they do not support any of the tax-advantaged accounts such as RRSP or TFSA. The accounts had to be non-registered – atleast it was, the last time I checked.

            I still have plenty of room in my tax advantaged accounts, so unless I use it up, I dont intend to use non-registered accounts for my investing needs.
            Thanks for sharing your details.
            R2R

  3. Bernie says:

    I had the same issues with Spanish Banco Santander ADR (SAN) in 2009 and Irish Fly Leasing Ltd ADR (FLY) in 2010. I held both briefly until I had to deal with the annoying withholding taxes on the dividends. Needless to say it is a lot less hassle to avoid these stocks altogether than to have to deal with a mass of paperwork annually to get a reduced withholding tax rate.

    • I can see why – I have avoided making my life complicated with tax paperwork so far, and dont intend to get into that rut now. Too bad you had to sell your positions just like I had to.

      R2R

  4. Like you, I hate to sell a div payer, but you gotta do what you gotta do. Nothing wrong with taking a little gain either. Fortunately, Medtronic isn’t the only well run company out there. I’m guessing you can find another spot for your funds.

  5. R2R,

    I think you did the right thing here. The hassle just doesn’t seem worth it. It’s a shame you had to sell since you still like the company, but at least you made a tidy profit that can buy you some less bothersome shares. Thanks for sharing.

    – HMB

    • HMB,
      Yeah…the 46% bump is a nice bonus for having to sell this quality name. I am already looking some healthcare stocks that I want to use those funds towards.

      R2R

  6. Thats too bad that you have to sell a quality company that have an issue with the tax that is beyond your control. The good thing though is you have a nice profit in less than two years. What company do you have in mind in replacing MDT in your portfolio, will it in healthcare?

    • Hi FFF,
      My healthcare sector has now diminished quite a bit and I would like to bring it back up. I am looking at putting those funds either in JNJ or AMGN or both. Im thinking that one cant go wrong with JNJ at a 3% yield. AMGN has a slightly higher valuation, but I am expecting a big increase in dividends from them come late summer/early fall.

      R2R

  7. yes that 1.6% dividend yield is kind of low, the 10 yr US bond is yielding more than that, plus the stock is near its life highs so no worries, can always find better yield plays in the next leg down in this market, maybe post the non farm payrolls (US) this friday.

    • Rajveer,
      I have cut down on my bond holdings almost completely. We only own bonds in my wife’s portfolio….which has its place. But simply comparing yields between bonds and stocks directly is a bit of a apples vs oranges. They serve different prospects in portfolios.

      With the bond yields so low, the market is paying a high price for each earning dollar on the stocks…so, the valuations are a bit stretched – still, one can easily find 3% yielders out theres – just need the right combination of yield and div growth in the potential investment.

      R2R

  8. Seems like a good move considering all the troubles you’ll face with the new company structure. You locked in a good gain and time to look for another stock to buy.

  9. Ran into the same problem. I bought ETN and ACN (both headquartered in Ireland) in a TFSA as I thought there was no withholding tax on the dividends. Surprise, surprise! I will sell when something better comes my way. I hold BBL, VOD and RDS.B (headquartered in the UK) in my TFSA and have never paid a withholding tax on these stocks.

    • Sorry to hear about your troubles. I am aware of the UK ADRs not getting taxed in TFSA and I believe its the same with Australian ADRs as well. I have a couple of those companies on my radar and will be looking to add sometime in the future.

      Thanks for sharing
      R2R

      • If I can chime in.

        The UK withholding tax rate is 0%. So wherever you hold UK stocks, there won’t be any withholding tax.

        The Australian withholding tax rate is not 0%. But, and this is where it’s interesting. If the Australian dividends are fully franked, there won’t be any withholding tax.

        I tried with ADR of Westpac in both my TFSA and RRSP accounts and never had to pay withholding tax since Westpac’s dividends are fully franked.

        • Thanks for chiming in and clarifying that, DE. Ive come across that term – ‘fully franked’…not sure I really understand what that means. I will have to read up on it. Good to hear that WBK is fully franked – it looks like a great high yield play on the Australian (and by extension Asian) financial sector.

          R2R

  10. R2R,

    That’s a shame, as MDT is a very solid company. But I wouldn’t be interested in that kind of hassle, either. I’m 100% in agreement of reducing one’s hassle as much and as often as possible. 🙂

    I’m sure you’ll find another great opportunity out there.

    Best regards!

  11. Dear R2R,

    Nice to meet you. This is Dividend Samurai from Japan. I know how great MDT is in part because one of my acquaintances works for MDT and he is a competent senior manager. Having said that, 1.6% yield with 20% income tax withheld makes MDT less attractive for income investors. Therefore, I can understand your rationale. I have never owned any MDT shares, unfortunately.

    • Thanks for stopping by and introducing yourself, DS. I will be sure to check out your blog and follow along.

      Theres a lot to like about MDT and still makes sense as an investment if the 20% dividend withholding tax doesnt apply. Good to hear the same from someone who knows working for the company.

      cheers
      R2R

  12. That’s a horrible reason to have to sell a solid stock, but I cannot agree more with your decision. Sometimes the extra hassle is just not worth it. There are many excellent stocks without the hassle that can take MDT’s place. Cheers!

    • Thats my thought process, FerdiS. Im sure there are plenty of other great companies that can give me good exposure to the healthcare sector and I can avoid these tax issues.

      Thanks for sharing your thoughts
      R2R

  13. I have to admit that seeing ‘sell’ posts among the dividend bloggers is extremely rare and typically it’s for good reason a stock is sold. I can understand you dumping your MDT because of withholding tax reasons. It’s a shame that such a strong company with great long term prospects has to leave your portfolio though. The bottom line with any investment we make is that you have to be happy with your holdings… and if a tax consequence is your reasoning for a sale then it obviously wasn’t a ‘happy’ stock for you.

      • Bernie says:

        I suppose another way of looking at this is Medtronic’s move to Ireland to save corporate taxes created new taxes for many of their shareholders. I wouldn’t consider the move “shareholder friendly” for those invested for dividend income.

        • True Bernie.
          Im sure there are plenty more in a similar boat as mine. Although..I think the broker should take care of all the paperwork, but considering I have a decent deal for my trading costs, its not worth moving to a different broker that honors the tax agreement.

          R2R

  14. Bernie says:

    @R2R,

    I know BMO InvestorLine does not from my previous experiences. For that matter, I don’t think any Canadian brokerages handle this sort of thing, unless it’s the US, UK and possibly Australia. For other countries I believe we’re left to fend for ourselves.

Leave a Reply

Your email address will not be published. Required fields are marked *