When investors think about healthcare stocks, growth is often the first word that pops into their minds. This happens with good reason, as healthcare issues are often quintessential growth stocks. By a 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 stock investors focus on the denominator in the price-to-earnings (P/E) ratio, looking for companies or industries where high expected earnings growth will propel stock prices upward. Such issues typically do not offer generous dividend yields, as company managements 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 greater 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 DrugMedical Supply (Invasive and Non-Invasive), Medical ServicesPharmacy Services, and Biotechnology Industries. First, we looked for companies with dividend yields above 1.0% and, then, to help ensure the dividends were sustainable, we limited the results to those firms 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. 

Covidien PLC

Covidien (COV) is a worldwide developer, manufacturer, and distributor of healthcare products used in clinical settings and homes. Its portfolio items are a regular fixture in the majority of hospitals in the United States. Further, it has a growing presence in non-U.S. markets, with 45% of fiscal 2011 sales (year ended September 23rd) being derived from foreign sources. The company’s business is divided into three operating segments: Medical Devices (67% of 2011 sales), Pharmaceuticals (17%), and Medical Supplies (16%). The company spent 4.7% of sales on research and development last fiscal year.

The medical supplies company reported strong fiscal year-end results, as sales and earnings increased 11.0% and 17.5%, respectively, year over year. Demand for vascular, energy, and stapling products is particularly high. Also, the company’s bottom line is benefiting from cost-containment initiatives as well as share repurchases. And with several clinical trials under way, Covidien should be able to keep momentum going over the long term.

A respectable dividend yield of 2% is a plus. In fact, management raised its dividend payments by 12.5%, to $0.225 for the early November payout. Although the company has a high long-term debt balance, it has ample cash ($1.8 billion at year end), to returns to shareholders.


Sanofi (SNY) is the fifth largest drug company in the world and the biggest in Europe. Its headquarters are located in Paris. The company operates in two major segments: Pharmaceuticals (87% of 2010 revenues) and Vaccines (13%). Sanofi has a broad-based portfolio including drugs such as Plavix and Lovenox, Multaq and Aprovel. Therapeutic areas are diverse, ranging from diabetes and cancer to cardiovascular health. In addition, Sanofi makes over 20 vaccines and spent 14% of sales on research and development activities in 2010.

Sanofi has several near- and long-term catalysts that should push the top- and bottom-lines higher. Third-quarter earnings grew at a double-digit clip versus last year and were derived from heightened demand for the company’s plethora of vaccines, especially the seasonal H1N1 flu vaccine in the United States. The recent acquisition of biotech giant Genzyme has been accretive to the company’s share-net performance, but the unit faces some supply constraints that ought to be resolved in the second half of 2012.

The company is focused on cutting costs in order to combat a “patent cliff” or the expiration of a number of patents that previously generated around $4 billion in profits. It has already made progress in replacing these sales through acquisitions in the consumer healthcare, animal health, and pharmaceuticals business. Further, SNY has five new products under review for European regulatory approval and it is focused on expanding in emerging markets. We view these as solid opportunities but investors do not yet appear fully convinced as the stock’s price to earnings ratio is currently below the industry average.

The aforementioned growth platforms should enable the pharmaceutical outfit to continue to pay a healthy dividend payment. In fact, the company’s annual distribution was increased this year by 20.3% and was recently yielding an impressive 5.3%. The balance sheet is strong, and we are optimistic that Sanofi will be able to continue to please income-oriented investors. Indeed, these quality shares may appeal to conservative value investors, in our view.

Steris Corporation

Steris Corp. (STE) develops, manufactures, and sells infection prevention, and control products to a range of customers in different industries such as healthcare, pharmaceutical, industrial, and research. Its product portfolio is diverse, and includes its flagship SYSTEM I and SYSTEM 1E liquid chemical sterilant processing system platforms. In addition, the company manufactures a range of unique capital equipment like surgical tables.

Higher SG&A expenses are creating a difficult short-term operating landscape for Steris Corp., and the company has a higher cost outlook for the remainder of the year. Sales, however, are advancing nicely, especially because of recovering demand from the healthcare industry. And growth in the longer term will likely be supported by an expanding range of product offerings as well as healthier spending patterns due to possible improvement in general economic and employment conditions.

Directors recently raised the dividend by $0.02, to $0.17 a share. And with historical annual dividend increases, the company is well positioned, in our view, to make further increases over time. Recently, these shares were yielding a respectable 2.3%.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.