The Real Reason the Medtronic Stock Price Is Climbing

The Medtronic stock price was climbing 1% in early trading today (Friday) to $78.13 after the maker of device-based medical therapies posted strong Q2 2016 earnings.

The Dublin, Ireland-headquartered Medtronic Plc. (NYSE: MDT) reported earnings per share (EPS) of $1.03 on $7.06 billion in revenue on Thursday. Revenue for Q2 2016 represents a 62% increase from Q2 2015 revenue of $4.36 billion.

The Medtronic stock price climbed today after the company posted strong Q2 2016 revenue growth. But there's a huge reason why MDT shareholders aren't happy.Medtronic produces pacemakers, implantable cardioverter defibrillators, and a variety of other medical products.

According to Bloomberg Business, Medtronic's growth strategy relies on three catalysts: growing sales in emerging markets, bringing new products to market, and convincing insurers and governments that the company's therapies can reduce costs for healthcare systems.

While those strategies have paid off, Medtronic has also used a much more controversial strategy for increasing profitability in 2015: tax inversion.

A tax-inversion deal is a merger between a U.S. and a foreign company designed to allow American companies to move their headquarters outside of the United States.

The move allows companies to escape high U.S. corporate tax rates. Roughly 51 U.S. companies have reincorporated to low-tax locations since 1982, according to Bloomberg.

Originally based in Minnesota, Medtronic completed its acquisition of Dublin-based Covidien for $49.8 billion in January 2015. Ireland's main corporate tax rate is 12.5%, while the U.S. corporate tax rate is 35%.

Medtronic had a tax rate of 18.4% in 2013, according to Forbes, but that was because Medtronic kept earnings from foreign operations outside of the United States and received tax breaks for research and development. So even though Medtronic wasn't paying the full 35%, it has still seen a tax decrease by moving to Ireland.

While the tax-inversion deal has helped the Medtronic stock price climb this year, the deal comes with a major catch...

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The Medtronic Stock Price and the True Cost of Tax Inversion

Medtronic will receive long-term benefits from reduced taxes, but individual investors end up footing the bill.

Also, this tax-inversion deal will hit shareholders with a capital gains tax as high as 33%. This is due to IRS-imposed taxes on these types of tax-inversion deals. Medtronic reimbursed its board members and executives for these taxes, but isn't doing the same for investors like you and me.

The U.S. economy also takes a beating when companies relocate...

In 2014, the U.S. Congress' Joint Committee on Taxation stated the U.S. government could lose as much as $19 billion over the next 10 years due to tax inversion.

Of course, it's easy to understand why these big companies are relocating their headquarters outside America...

The United States has the highest corporate tax rate in the world at 35%. The U.S. also taxes all profits a company makes, whether the profits are made nationally or internationally. Other major world economies will only tax a companies' profits that are earned domestically.

At first glance, Medtronic and the Medtronic stock price may look appealing to investors. Medtronic is part of a very profitable health industry, and Plunkett Research projects that spending on healthcare will reach $3.78 trillion by 2018.

With its 62% increase in revenue growth, it would also appear that the company's strategies are rewarding MDT shareholders.

But new investors need to understand what the tax-inversion deal will mean for the Medtronic stock price today and in the future. Because of regulations, Medtronic will not be able to use cash from its foreign earnings to make any investments in the United States.

U.S. revenue represented 58% of the company's top line, which could fall without continued investments in innovation.

While investors looking at the climbing MDT stock price today could focus on the 62% revenue increase, many don't realize the pitfalls these tax-inversion deals can have for retail investors.

Jack Delaney is an Associate Editor for Money Morning. You can follow him on Twitter and follow Money Morning on Facebook.

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