The healthcare sector is benefiting from trends that are creating products and services we all need in good times and bad.
Aging populations in developed economies need more drugs and procedures, emerging market economies are expanding public health and health insurance and new technologies are creating new products and services.
Investment choices in Canadian companies are limited, in part due to the nature of our publicly funded system. The S&P/TSX Capped Health Care Index has 10 companies, of which five are cannabis companies, up from three a year ago. The median market capitalization is C$3 billion.
There’s plenty more to choose from south of the border. The S&P 500 Healthcare Index has 61 constituents with a median market capitalization of US $30.8 billion. Globally, the U.S. ranks highest in overall healthcare spending.
Here are updates on three U.S. healthcare choices. The companies have staying power and pay dividends that tend to rise. If the sector is out of favour, the stocks are that much cheaper.
UnitedHealth Group Inc. (NYSE: UNH) Closed Friday at $293.58. (All currency figures in U.S. dollars.)
Background: UnitedHealth Group is the largest healthcare company in the world, with trailing 12 month revenue of $237.8 billion. It has 320,0000 employees and offers healthcare insurance and technology-enabled health services to 115 million customers.
Performance: The stock hit a 52-week low in the $215 range in October but rebounded strongly on the strength of good results and a better political climate. The shares are trading near new highs and, as of the time of writing, are up 12.4% in the last 12 months. They received a 3% bump when the company released quarterly and year-end results on Jan. 15.
Recent developments: UnitedHealth’s latest quarter showed that strong growth in all its operating segments raised revenues and profits.
The core business of health insurance plans brought in revenue of $48.25 billion, a 4.4% rise from a year earlier. The driver was health plans for people aged 65 years and older.
The company also saw growth in its Optum business, which manages drug benefits and offers healthcare data analytics services. Revenue from Optum rose about 8% to $29.8 billion.
Annual revenues of $242 billion were 7% higher year-over-year. Adjusted net earnings per share were $15.11, up 17%. The company said it is aiming for between 2.2% and 4.2% profit growth in 2020.
Dividend and buybacks: UnitedHealth increased its dividend by 20% in June 2019 to $1.08 per quarter ($4.32 per year). The stock yields 1.44% at the current price. During the past 10 years, the average annual growth in dividends per share has been 57.70%.
The company continues to aggressively buy back stock. It repurchased 22.4 million shares for $5.5 billion in 2019:
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iShares U.S. Medical Devices ETF (NYSE: IHI) Closed Friday at $273.18 (All currency figures in U.S. dollars.)
Background: This ETF is narrowly focused on U.S. manufacturers in the medical device sector. In the last decade, it has performed significantly better than the S&P 500.
Portfolio: The ETF was launched in 2006 and has $4.84 billion in assets. It holds 56 stocks, but the top five holdings account for about half of its value. These are Medtronic (13.1%), Abbott Labs (12.7%), Thermo Fisher Scientific (11.1%), Danaher Corp (8%), and Stryker. (4.6%)
Performance: The ETF is up 19.6% since being recommended in June and had a total one-year return to Dec. 31 of 32.72%. The strong performance of the top holdings explains the gains.
Medtronic’s latest earnings beat expectations for the 14th consecutive quarter as it benefited from purchases aimed at beefing up its robotic surgery businesses. Medtronic expects 2020 performance to be strong.
Abbott Labs increased its dividend 12.5% in December, capping a year which also saw strong profit growth. Abbott sells a range of generic drugs as well as medical devices and nutrition products such as Ensure and Similac.
Over the last three years, Abbott’s stock is up 122%. One area of strength is demand for heart devices and its glucose monitoring system that uses sensors to track blood sugar levels.
Key metrics: The ETF has a management fee of 0.43% and modest trailing 12-month dividend yield of 0.32%. It also has a very high p/e ratio of 46.48, which says high growth expectations are built into the price. Any distributions would be subject to U.S. withholding tax.
This ETF is not suitable for income investors, but the underlying assets are strong and the trends are favourable for long term capital appreciation.
Stryker Corp. (NYSE:SYK) Closed Friday at $214.51. (All currency figures in U.S. dollars.)
Background: Stryker Corp. is a Fortune 500 medical technology company with a market capitalization of $79.4 billion. It is based in Michigan but operates in 100 countries and employs more than 33,000 people.
The company has three main products lines. The orthopedics segment provides hip and knee implants. The medical surgical segment sells surgical equipment, including robots and other navigational aids, as well emergency medical equipment and disposable products. The neurotechnology segment provides products for brain and skull surgery.
Performance: The stock reached an all-time high of $223 in September before pulling back to the current level. The shares are up 27% in the past 12 months and 3.5% year to date.
Recent developments: Like Medtronic, Stryker is expanding its robotic surgery systems. Its focus is hips and knees and it has sold more than 800 of its Mako systems, which assist surgeons. More than three-quarters of the sales are in the U.S., with Japan and China being Stryker’s geographic priorities for expanding sales. Hip replacement procedures in the U.S. using robots were up approximately 40% year-over-year.
Mako helped Stryker to an overall revenue gain of 8.6% in its latest quarter. Sales rose 10.6% to $3.6 billion with adjusted earnings per share increasing 13%. Looking ahead to its 2019 year-end, Stryker anticipated organic sales growth to be a healthy 7.5% to 8%.
Dividend: The dividend was increased by 11% in December to $0.575 quarterly ($2.30 annually) to yield 1.1%.
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(These updates appeared in the Internet Wealth Builder on Jan. 27, 2020)