As worries about inflation and rising interest rates dominate the news, one place investors are looking for stability and safety is healthcare multinationals.
During the tech boom, these solid, mature businesses were considered boring and predictable. Now they are taking on a new appeal for exactly those reasons. With their size comes financial stability and products that are always in demand.
That means strong cash flows and growing dividend streams along with share price appreciation in all conditions. Some are so-called dividend aristocrats, an elite group of public companies that have raised their dividends in each of the last 25 years.
“Large cap healthcare companies are superior goods,” says Paul MacDonald, Chief Investment Officer at Harvest Portfolios Group in Oakville, Ont. “We need them all the time. They’re not immune to recession, but they’re very much insulated from it.”
Mr. MacDonald is the portfolio manager of the Harvest Healthcare Leaders Income ETF, which is the largest Canadian healthcare exchange traded fund. It has $1.2 billion in assets under administration (AUM) and holds 20 of the largest global healthcare companies. Four of the 20 holdings are dividend aristocrats and another seven are close, having increased their payments in most years, but without a perfect record.
“That includes three recessions which suggests the dividends are safe and the probability of increases is also high,” Mr. MacDonald says.
Nick Kalivas, Head Factor and Core Equity ETF Strategist at Atlanta-based asset manager Invesco Ltd., agrees that healthcare offers defensive growth, much like consumer staple companies that sell groceries and household goods and many real estate investment trusts (REITs).
“Demand is pretty inelastic,” he says. “If you get sick you have to go to the doctor regardless [of the state of the economy.]
Invesco markets the Invesco S&P 500 Equal Weight Health Care ETF (NYSE:RYH) which has 66 holdings with US $897 AUM. Many of the holdings overlap with the Harvest fund.
Both analysts agree that over the medium to longer term, the healthcare sector has several favourable secular themes. The first is aging populations in developed markets. An older demographic spends more money on health, including drugs, medical supplies and surgical procedures. The second is technological and product innovation. Mr. Kalivas notes this innovation includes medications and treatments. Such things as robot-assisted surgeries and new medical devices fall into this category. They mean less invasive surgeries, leading to faster healing, reduced hospital stays and so increased demand.
The third trend is growth in emerging markets where demand for basic services is rising with incomes. Mr. MacDonald notes that pre-pandemic, healthcare expenditures in China and India were growing at a 14 per cent annual compound rate, about two and a half times that of the United States.
Inflationary pressures have less impact on these companies too. They sell high margin products and can absorb some price increases and pass some on. They have less exposure to the rising price for commodities since their products are less tied to these raw materials.
“If you’re looking for dividend growth, I would put them at the top of the list. They’re great well positioned companies.”
He says the total dividends per share paid by these four companies over the past 25 years illustrates their quality. Johnson & Johnson has paid US $50.65 per share over that period, Merck has paid US $40.79, United Health, US $29.70 and Pfizer US $22.27.
Johnson & Johnson with its consumer health, pharmaceutical and medical devices segments has raised its dividend in each of the last 50 years, according to the company web site. The shares are currently yielding 2.5 per cent.
Merck is one of the largest global pharmaceutical companies with such leading products as Keytruda a cancer drug and HPV vaccine Guardasil. It is the second largest player in animal health. Its current yield is 2.9 per cent.
United Health is the 7th largest American company by revenue in the Fortune 500 ranking. It offers health insurance to individuals and companies and administers such things as medicare. Its stock has a current dividend yield of 1.1%
Mr. MacDonald says Pfizer is a top choice for growth and income. He estimates Pfizer has 60 per cent of the global market for Covid-19 vaccinations and oral antiviral treatments where its Paxlovid is a leading product. He expects these medicines to generate US$54 billion in 2022 and $33 billion in 2023.
The company is putting its Covid vaccine windfall to use with acquisitions and reinvestments.
“There’s no question Pfizer has been the winner,” he says.
Mr. Kalivas notes that healthcare distributors have performed well this year. This group includes such companies as Cardinal Health Inc. (NYSE:CAH) which distributes drugs and medical products to more than 100,000 hospitals and pharmacies. McKesson Corp. (NYSE: MCK) is another name in this area.