When investors think about health care stocks, growth is often the first word that pops into their minds. This happens with good reason, as health care issues are often quintessential growth stocks. By growth stock we mean the shares of a company whose earnings are increasing at a higher rate than that of its peers. In general, growth investors focus on the denominator in the price-to-earnings (P/E) ratio, looking for companies or industries where elevated expected earnings growth will propel stock prices still higher. Such issues typically do not offer rich dividend yields, as company managers usually prefer to reinvest profits in the business in order to take advantage of high returns on capital and support bottom-line growth, rather than distribute a portion of net income to shareholders in the form of dividends.
That said, there are healthcare companies that pay dividends, a number of which are quite generous. To find some of these issues, we screened the Drug, Medical Supply, Medical Services, Pharmacy Services, and Biotechnology industries. First, we looked for companies with dividend yields above 1.5% and, then, to help ensure the dividends were sustainable, we limited the results to those companies with long-term debt as a percentage of total capital below 50%. Most of the highest-yielding stocks that our screen returned were drug companies. Not too surprisingly, no biotech enterprises made the cut.
Bristol-Myers Squibb Company (BMY) manufactures proprietary medical products, ethical pharmaceuticals, diagnostics, infant formula, orthopedic implants, and health & beauty aids. Some of its major brands include: Plavix, Avapro, Pravachol, Coumadin, Reyataz, Sustiva, Baraclude, Erbitux, Taxol, Sprycel, Ixempra, Abilify, Enfamil, and Enfagrow. The company operates on a global scale, with international markets accounting for about half of its 2009 sales. To keep its new drug development program very active, Bristol-Myers invests about 16% of sales into research.
The company’s long-term earnings prospects are looking firmer these days, because some late-stage drug products are showing better-than-anticipated promise. In addition, strong cash flow generation has prompted the board of directors to raise the quarterly dividend by 3.1% (from $0.32 to $0.33 a share). The first payment in the new amount is due February 1, 2011. Bristol has over $8 billion of cash on its balance sheet, which combined with solid cash flow, suggest that the dividend should continue to grow.
Merck (MRK – Free Merck Stock Report) is a leading manufacturer of human and animal health care and specialty chemical products. Some of its important product names include Singulair (asthma), Zocor (cholesterol), Fosamax (osteoporosis), Vasotec (high blood pressure), and Prilosec (acid reflux). The company invests about 20% of sales annually into research and development to keep its product pipeline flowing.
Although healthcare reform is causing some uncertainty, Merck’s prospects ought to be aided by the expanded global footprint and product portfolio from its merger with Schering-Plough. In any case, the dividend should continue to be well covered by future cash flows. The company currently has over $10 billion of cash on its balance sheet.
Walgreen Company (WAG) is the nation’s largest drug retail chain and distributor, with over 7,500 drugstores in 49 states and Puerto Rico, 100 home care facilities, and 2 mail service facilities. Pharmacy products account for approximately 65% of total sales, while general merchandise makes up the balance (35%). The Duane Reade drugstore chain was acquired in April, 2010 for $1.1 billion.
Near-term fundamentals should be aided by expanded sales and improved margins (due to cost restructuring), leading to solid free cash flow. Longer term, Walgreen is expected to benefit from the growing convergence of health care and retail services. Because consumers have greater access to health care information, patients are increasingly becoming shoppers of health care. With 32 million more Americans scheduled to gain access to health care coverage in 2014, we see substantial opportunities ahead. So, with the company’s finances in good shape, continued dividend increases are highly likely in the future.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.