The health care industry, with increasing regulation, variably strong and weak pipelines, and substantial risk, can be a potentially lucrative sector. Blue chip health care companies, as a whole, generally lagged the overall market over the last two years.
But prudent investors know that some of the best buys are when the consensus is not cheery, and that diamonds can be found in the rough of most out-of-favor industries. With an aging population in many developed nations, and the universal need of bodily and mental care, health care companies with strong fundamentals, reasonable growth prospects, and shareholder friendly management may be poised to offer significant overall shareholder returns over the long-term, both in the form of passive income and capital appreciation.
Here are six corporations that, among others, may be worth a closer look for both their yield and their value.
Abbot Laboratories (ABT)
Abbott’s pipeline may be nothing to write home about, but with the profitable Humira and other leading pharmaceuticals, along with a successful track record of acquisitions and a large and diverse set of operations, Abbott may offer a significant value. The dividend aristocrat has a mediocre balance sheet, with a sizable amount of debt and goodwill, but a high interest coverage ratio and diverse free cash flow generating operations.
Full Abbott Analysis
Dividend Yield: 3.60%
Latest Dividend Increase: 9%
LT Debt/Equity: 0.56
Return on Equity (TTM): 20%
Johnson and Johnson (JNJ)
The best returns are often not made when an investor agrees with the rest of the market. Johnson and Johnson largely missed out on this two year rally due to a variety of quality control failures that led to recalls. But the company continues to be incredibly diverse, capable of generating incredible free cash flow, and has an exceptionally strong financial position. A portfolio of consumer health products, including Johnson’s baby care, Neutrogena, Aveeno, Neosporin, Band-Aid, Listerine, and Visine are a set of consumer health products that round out their medical devices and pharameceutical portfolios. In addition, the company recently announced a definitive merger with Synthes, a $21 billion deal to strengthen JNJ’s orthopedic market share and product line. They continue to develop their patent moat, and spend billions on research and development each year. With a substantial dividend yield, combined with decades of dividend growth, the company may provide a solid return over the long term as it increases yield on cost year after year.
Full Johnson and Johnson Analysis
Dividend Yield: 3.45%
Latest Dividend Increase: 6%
LT Debt/Equity: 0.16
Return on Equity (TTM): 21%
Novartis is arguably one of the strongest contenders on this list. The company produces a diverse list of drugs, as well as over-the-counter consumer health products, and animal health products. Based in Switzerland, the company recently acquired Alcon, a $50 billion eye care company. Novartis has a moderately strong balance sheet, with a fairly low debt/equity ratio, reasonable amounts of goodwill, and a high interest coverage ratio. The pipeline is strong, but with a few major drugs nearing expiration, there is some shorter term risk, but this might be giving patient investors a longer term buying opportunity.
Full Novartis Analysis
Dividend Yield: 3.85%
Latest Dividend Increase: 5% (in home currency)
LT Debt/Equity: 0.22
Return on Equity (TTM): 16%
Bristol -Myers Squibb (BMY)
BMY faces large patent losses in 2011 and onwards, but has a fair amount of cash, a very strong balance sheet, and pipeline potential to potentially offset this. Still, investors should be wary of the upcoming reductions in revenue (notably the loss of the drug Plavix to generics), and take this into account in their valuations. I’d suggest that the current valuation of the stock doesn’t leave much margin of error for impending patent losses. Still, the company is very solid financially, and offers a particularly high current dividend yield.
Dividend Yield: 4.65%
Latest Dividend Increase: 3%
LT Debt/Equity: 0.33
Return on Equity (TTM): 21%
This London-based company, which traces its roots back over 100 years, has a strong late-stage pipeline but significant 2012 patent expirations, and £3.6 billion worth of pharmaceutical sales exposure to emerging markets. The dividend yield is quite high, but the balance sheet isn’t as strong as some of the others in terms of debt/equity and interest coverage ratio. The company’s vaccine business is particularly impressive, accounting for nearly a billion and a half vaccine doses in 2010.
Dividend Yield: 4.90%
Latest Dividend Increase: 6% (in home currency)
LT Debt/Equity: 1.63
Return on Equity (TTM): 19%
Pfizer produces numerous drugs such as Lipitor and Viagra, along with consumer health products such as Advil for pain relief, and Centrum multivitamins. The company is rather well-known to many dividend investors for cutting its dividend in 2009 in order to acquire Wyeth. Another major issue is that Lipitor, the company’s blockbuster drug, is going to have generic competition this year. Earlier in 2011, the CEO announced a slash in the research and development budget, in addition to a reduction in the job force, to streamline the enormous corporation and return more value to shareholders to the tune of a multi-billion dollar share buyback program. The company has a moderately strong balance sheet, with a fairly low debt/equity ratio, a healthy interest coverage ratio, but substantial goodwill.
Dividend Yield: 3.85%
Latest Dividend Increase: 11%
LT Debt/Equity: 0.40
Return on Equity (TTM): 10%
Full Disclosure: As of this writing, I am long ABT and JNJ, and none of the other companies mentioned.
You can see my list of individual stock holdings here.
This is good information, but I would worry about some of the pipelines. The good news is that it is possible to effectively outsource R & D by partnering with more nimble companies or purchasing promising pipelines.
My Own Advisor
R&D pipelines are highly cyclical. I’m in this sector for the long-haul.
Totally agree, “prudent investors know that some of the best buys are when the consensus is not cheery…”. Well said and so very true my friend!
Thanks for the great analysis. All of these stocks appear to be fairly cheap, probably because of the amount of uncertainty surrounding their pipelines. As manager of the Arbor Asset Allocation Model Portfolio (AAAMP) I currently own only Abbott Labs (ABT) but would certainly look at the others at lower prices.
ERROR: JNJ last dividend increase wasn’t 10% — It was 5.6%
That’s true Matty.
I looked at the previous dividend increase rather than the latest one.
Great list of healthy yields in the health care sector. Thanks for the article. Obviously ABT and JNJ are the popular picks in this space, and for good reason. Your recent write-up on Novartis gave me some fodder to play with and that seems like a good pick too. Have a great holiday weekend!
I sure wouldn’t worry about the pipelines. That’s silly stuff, I think, when thinking about holding great businesses for 20 years. Nobody is going to know what any of these businesses will be selling in ten years, never mind what materializing seeds they have in the pipelines today. I think you’d do well to buy them all….when all of their pipelines are practically dry, if possible. You know what that means! Cheap prices. What does a full pipeline mean? A rosy consensus—never a time to buy, on Wall Street. Buying all of these stocks today, and holding for 30 years, will likely turn out to be a fabulous investment. Sadly, few investors have the fortitude to hang on for the long term, while reinvesting dividends. Their loss.
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