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 with earnings that are increasing at a higher rate than peers. In general, growth 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 robust 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 Invasive and Non-Invasive, Medical Services, Pharmacy Services, and Biotechnology industries. First, we looked for companies with dividend yields above 2% 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 35%. The list contained 17 stocks (see below), we highlighted two with appealing investment merit: Merck & Co. (MRK - Free Merck Stock Report) and Bristol-Myers Squibb (BMY).

Merck & Co.

Merck is a global healthcare company that provides health solutions to humans and animals. The company has four operating segments: Pharmaceutical, Animal Health, Consumer Care, and Alliances. Pharmaceutical products treat a wide range of illnesses including cardiovascular disorders, diabetes, and respiratory problems. Some major brands are Singulair (respiratory), Zetia and Vytorin (cholesterol) and Januvia (diabetes), the highest selling line in Merck's history. The company also develops and markets vaccines and antibiotics. It manufactures several products that promote animal health and also has consumer-care products such as lotions and sunscreens. Merck has several distribution channels including hospitals, physician and veterinary offices, as well as wholesalers/retailers.

Merck ended 2012 in good form as top-line results surpassed Wall Street’s estimates by a marginal degree, but fell short of last year’s tally due to the 2012 patent expiration of Singulair in the U.S. Sales of Januvia/Janumet rose 20%, allowing the line to maintain a 70% market share. HPV vaccine Gardasil was up over 50% year over yaer, due to Japanese and public sector sales, as well as increased use in males. Flu vaccine Zostavax also grew in the double digits. Excluding Singulair underlying sales grew 5% in 2012.

Patent expiration remains a headwind in 2013 with Singulair in Europe, Propecia (hair loss) and Maxalt (migraines) all set to lose protection. Still, the company hopes sales will remain flat on a constant currency basis with growth in Januvia, vaccines, animal health, consumer health, and emerging markets.

We expect progress in gaining regulatory approval for pipeline drugs this year. If approved, Merck believes Suvorexant will interest the 30% of the population it claims (citing market research) has sleeping issues, a large faction of which are dissatisfied with current medicines. Merck said "safety issues" will delay the application for regulatory approval of osteoporosis drug Odanacatib until 2014, but the drug has immense potential. Other promising pipeline medicines attempt to fight cancer and Alzheimer’s as well as grass and ragweed allergies.

Conservative investors should find this high-quality equity appealing. Although the company faces headwinds, it seems well situated to realize healthy top- and bottom-line growth in the 3- to 5-year period, given its arsenal of products and solid management team. The stock offers an above average dividend payment, which is currently yielding 4.2%, well above the Value Line median. Strong finances that consist of ample cash and manageable debt, make the company well positioned to continue sharing the wealth with shareholders, through ongoing dividend payments.

Bristol-Myers Squibb

Bristol-Myers Squibb is a biopharmaceutical company that discovers, manufactures, and distributes medical products and pharmaceuticals used to treat serious diseases worldwide. Major products include Plavix, reduces the risk of stroke and heart attack, Avapro, a hypertension therapy, and Abilify, a product for adults with schizophrenia, bipolar and depressive disorders. In 2012, the company spent approximately $3.9 billion or 22% of sales on research and development .

The pharmaceutical giant encountered several headwinds during 2012, which hindered its performance. At the forefront, several patent expirations led to a lower sales tally compared to the prior year. The major expiration was Plavix in May of 2012.

That said, we expect the next two years (2013 and 2014) to be better. This is partly because the company recently gained regulatory approval for two additional drugs. The FDA approved Eliquis, a revolutionary new blood thinner to prevent stroke in people with atrial fibrillation, i.e. irregular heartbeat, a disorder that affects about 3 million Americans. Further, European regulators approved Forxiga, a drug developed in partnership with AstraZeneca (AZN) for the treatment of type 2 diabetes. Overall we believe new drugs and ones in the pipeline position Bristol well to replenish lost revenues from patent expiration. 

Despite some near-term headwinds, the company is backed by a solid financial position, that is, a reasonably low debt-to-capital ratio and the ability to generate ample cash. Strong finances should allow the pursuit of further growth catalysts such as portfolio expansions and/or acquisitions. Also, some of the extra cash is given back to shareholders in the form of an above-average dividend payment, which is currently yielding 3.83%. We are confident that the company will continue to cater to income-oriented investors with future dividend payments.



Company Ticker Industry Name
Questcor Pharmac. QCOR Biotechnology
AstraZeneca PLC (ADS) AZN Drug
Bristol-Myers Squibb BMY Drug
GlaxoSmithKline ADR GSK Drug
Lilly (Eli) LLY Drug
Merck & Co. MRK Drug
Novartis AG ADR NVS Drug
Pfizer, Inc. PFE Drug
Sanofi ADR SNY Drug
Teva Pharmac. ADR TEVA Drug
St. Jude Medical STJ Med Supp Invasive
Cardinal Health CAH Med Supp Non-Invasive
Johnson & Johnson JNJ Med Supp Non-Invasive
Meridian Bioscience VIVO Med Supp Non-Invasive
Owens & Minor OMI Med Supp Non-Invasive
PetMed Express PETS Pharmacy Services
Walgreen Co. WAG Pharmacy Services

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