Smith & Nephew plc (SN.) Ordinary USD0.20

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Smith & Nephew’s underlying full-year revenue grew slightly faster than guided, up 5.3% to $ 6.2bn. Growth was positive in all geographic segments and divisions.

Trading profit was up 15.5% to $1.2bn, in line with consensus forecasts, as productivity improvements more than offset challenges including tariffs and price pressure in China.

Free cash flow increased by 52% to $0.8bn, helped by a reduction in inventory. Net debt, including lease liabilities, was $2.8bn.

Underlying revenue growth guidance for 2026 remains at 6%. Trading profit is expected to grow organically by 8%. The implied margin is lower than expected, held back by external and internal headwinds and the initial impact of a recent acquisition.

The full-year dividend increased 4.3% to 39.1c per share. The $500bn buyback has been completed.

The shares fell 5.4% in early trading.

Our view

Smith & Nephew had a strong end to 2025, but with sentiment having strengthened since the recent strategy update, investors may have been hoping for a clearer signal of growing momentum in 2026.

The medical device maker operates through three segments; Orthopaedics - offering hip and knee replacements, Sports Medicine - a soft tissue repair business, and Wound Management - providing materials to manage injuries and prevent infection.

The Orthopaedics division has been a problem child for the group, hampered by a lack of scale. Operational improvements have had some success in overseas markets, and there are some early signs that this can be replicated in the US.

The division’s biggest revenue generator is knee replacements. In the US, this category has been underperforming the wider market as it shifts from older product lines to its next-generation implants. Orthopaedics just posted its strongest quarter in two years, but a key initiative for further near-term success is the launch of the streamlined knee platform (LANDMARK) later this year. We think it’s an exciting opportunity, but also one where investors will want to see quick results.

We see innovation as its biggest weapon for growing its share of a competitive market. In advanced wound care, the group’s negative pressure therapy products continue to evolve as management targets a multi-year growth opportunity. But changes to how much US healthcare providers are prepared to pay for skin substitutes could be a $20-$40mn profit hit this year.

The group also faces some other challenges. Tariffs are expected to dent this year’s results by around $60mn, and while pricing pressure is easing in China, further reductions are expected in some product lines.

There’s a prospective yield of 2.7% on offer, and there’s scope for more generous shareholder payouts further down the line if management can hit its $1bn annual free cash flow target by 2028 – though not guaranteed.

That also supports opportunistic acquisitions like the recent takeover of shoulder specialist Integrity Orthopaedics. Smith and Nephew should be able to bring this novel technology to a wider audience, but the investment required to do so is going to be a further drag on profits this year.

As it stands, Smith & Nephew’s valuation looks broadly reflective of market forecasts. If management can deliver on its medium-term targets, there’s scope for profitability to improve, and with it some upside. However, there’s a long way to go if the company is to challenge the higher growth, higher margin names elsewhere in the sector.

Environmental, social and governance (ESG) risk

The healthcare industry is medium/high risk in terms of ESG, depending on subindustry. Across the board, product governance is the most acute risk, with business ethics, labour relations and data privacy also contributing. Providing reasonable access to healthcare as a basic service is also a growing issue, with greater concerns surrounding the social implications of for-profit healthcare companies.

According to Sustainalytics, Smith & Nephew’s management of ESG risks is strong.

The company does not appear to be caught up in any significant controversies. Its strong position in the hip transplant market leaves it exposed to higher litigation risk than some peers. Smith & Nephew addresses this risk via the relevant product safety certifications. There are also strong programmes in place for whistleblowing, and bribery and corruption, as well as an adequate cybersecurity programme. However, the company’s clinical trial programme has scope for improvement, as does its approach towards diversity and inclusion.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.

Previous Smith & Nephew plc updates