With all the concern about China’s market meltdown and the continuing drama in Greece stoking uncertainty, it’s natural to take a look at your portfolio and think primarily about protecting what you have instead of worrying about how to make it grow.
That’s particularly true if you’re at or near retirement, or if you’re simply an income-oriented investor who prefers stability and dividends to the potential of higher rewards that come with much higher risks.
If you’re thinking about getting defensive right now, many companies in the healthcare sector offer a unique opportunity. The sector offers a combination of stability, built-in growth and the potential for big dividends. Few other investments offer this same combination of attractive factors, and now is a particularly good time to consider getting overweight in healthcare.
Of course, you have to be selective. There are plenty of high-risk healthcare plays such as development-stage biotechs, and there are plenty of low-growth segments such as aging pharmaceutical giants who risk being left behind.
But if you’re selective, there are some great healthcare plays out there that can offer a degree of certainty in an otherwise uncertain market.
Here five of them:
Low-Risk Healthcare Stocks: Johnson & Johnson (JNJ)
Market Cap: $273 billion
YTD Performance: -6% vs. a flat market
Dividend Yield: 3.1%
When it comes to stability, what’s not to like about Johnson & Johnson (JNJ)? There’s a reason this pick is an old favorite among defensive dividend stocks.
For starters, it’s a healthcare play and can capitalize on the recession-proof nature of spending in this sector, but it’s also a consumer staples play thanks to popular brands including Band-Aid, Tylenol and Splenda. That keeps JNJ revenue firm in any market.
There’s also its bulletproof balance sheet, with over $31 billion in cash and its highest-level credit rating; JNJ is one of just three stocks with a AAA credit rating from Standard & Poors (the others are Exxon Mobil (XOM) and Microsoft (MSFT) if you’re curious).
It’s also a dividend darling, with payouts since 1944, and 53 consecutive years of dividend increases. The headline yield is nothing to sneeze at either, with a 3%-plus payout that is better than Treasuries by a significant amount.
J&J admittedly is facing top- and bottom-line pressures in 2015, as both revenue and earnings are expected to roll back slightly. But long-term investors can have confidence in JNJ particularly after a recent decline has already baked in these pressures. In fact, JNJ has a forward price-to-earnings ratio of only about 15 right now — significantly below the forward P/E of about 18 for the broader S&P 500.
Think of it this way: If the market is going to throw Wall Street for a loop, what kind of companies do you want in your corner? To me, an entrenched and well-capitalized mega-cap that is trading at an attractive valuation should be on the top of the list for long-term investors.
Low-Risk Healthcare Stocks: Select Medical Holdings (SEM)
Market Cap: $2 billion
YTD Performance: +11%
Dividend Yield: 2.5%
Select Medical Holdings (SEM) is a major hospital and outpatient clinic operator, with locations all over the U.S.
While hospitals can be difficult investments with low margins in certain areas, particularly when Medicare beneficiaries make up the majority of patients, SEM doesn’t have the same pressures as other competitors. In fact, less than half of all net operating revenues were from the Medicare program — not bad, considering the massive share these older patients make up of all medical billings nationwide.
Furthermore, while some hospital operators are in trouble or reluctant to take risks given the challenging environment, SEM is decidedly still in growth mode. This is evidenced by a recent partnership on plans to partner on a new 60-bed acute rehab center just days ago, as well as a new 52-week high for the stock in June after a nice market-beating performance recently.
Throw in the fact that the Affordable Care Act, also known as Obamacare, has been reinforced by a Supreme Court ruling and there are lots of reasons to believe in the stability of Select Medical Holdings for the coming months — even if the market at large takes a tumble.
Nobody likes to wind up in the hospital, but every long-term investor should have some kind of exposure to this kind of healthcare stock in their portfolio.
Low-Risk Healthcare Stocks: Teva Pharmaceutical Industries (TEVA)
Market Cap: $59 billion
YTD Performance: +6%
Dividend Yield: 2.2%
Teva Pharmaceuticals (TEVA) isn’t a household name like blue-chip drugmakers, and it isn’t a biotech darling like high-powered pharma stocks researching impressive new cures. Teva is actually quite boring, really, as the world’s largest manufacturer of generic medications.
But that unassuming business model actually gives TEVA stock a degree of stability you simply can’t find elsewhere in pharma. That’s because after a big company has run its course with a patented medication, TEVA steps in and makes the same drug for cheaper and sells it for less.
In other words, Teva is happy to settle for smaller margins in exchange for a high degree of certainty with its drug sales. And with more than $20 billion in sales annually in all corners of the globe, Teva seems to be doing just fine by connecting the most popular drugs with millions of patients around the globe.
Sure, there’s no breakout potential in TEVA stock because it’s not about to develop the next blockbuster cancer cure. But that’s the point. There is no patent expiration to fear, or big drug research costs to shoulder.
And considering the fragmented global generics market, there is huge long-term potential for Teva as it expands around the globe. There are competitors, yes, but Teva is doing its best to either put them out of business or roll them up, as evidenced by its $40 billion bid for rival Mylan (MYL) earlier this year — a bid it’s considering raising to get the deal done. At the same time, Teva is starting to slip a few jabs in the branded pharma space to boost margins a bit, including the purchase of neurology drug company Auspex Pharmaceuticals for $3.5 billion a few months ago.
Throw in a sustainable 2%-plus dividend that is less than a third of earnings, as well as some $3.4 billion in cash on the books, and you have a stable play with growth potential that should hang tough in any market.
Low-Risk Healthcare Stocks: HCP Inc. (HCP)
Market Cap: $17 billion
YTD Performance: -14%
Dividend Yield: 6%
While HCP Inc. (HCP) is a real estate investment trust — a type of asset that can be sensitive to interest rates — its portfolio of healthcare-related properties makes it worthy of inclusion in this group. And though shares have softened up lately, HCP is a very stable play for the long term when you bake in the dividends.
So the recent roll-back should be seen as a buying opportunity.
HCP operates senior-housing facilities, medical offices and hospitals enjoy a recession-proof business that is dictated by the need for care, not cyclical economic trends. As a result of this reliable revenue, HCP is able to support a big-time dividend that today tallies 6%. That dividend has been paid (and increased) on an uninterrupted basis since 1985. And with adjusted funds from operations at 79 cents a share last quarter, the dividend of 56 cents per share quarterly is quite sustainable at a 71% payout rate.
Yes, share performance has been sluggish. But what you’re buying in HCP isn’t momentum or the hope of a stock that doubles overnight. Consider the super-low beta of 0.45, indicating this stock “wiggles” less than half as much as the broader market does. That means getting left behind during a mammoth rally, yes, but it also means hanging tough no matter what Wall Street throws your way.
Besides, when you are guaranteed over 6% yearly with this REIT via dividends, you don’t need explosive share performance. What you’re buying is stability and income.
And given the long-term demographic trends that will continue to boost demand for healthcare — particularly senior housing as the baby boomers age — there are few stocks that are better positioned for the long haul than this dividend darling.
Low-Risk Healthcare Stocks: Cardinal Health (CAH)
Market Cap: $28 billion
YTD Performance: +5%
Dividend Yield: 1.9%
Cardinal Health (CAH) has an interesting story, getting its start in the early 1970s as a food distributor of all things. But as Cardinal moved into the distribution of pharmaceuticals and medical supplies in the 1980s, it really hit its stride. Now it boasts annual revenues anywhere between $90 billion and $110 billion — and it’s set to see its top line grow by double digits this year over 2014.
Cardinal doesn’t have the same exposure to patent risk and other changes in the healthcare landscape as other companies, making its money on staples like IV equipment and bandages that will be in strong demand no matter what. This may limit its breakout potential, but makes it quite attractive for the kind of healthcare investment we’re talking about in this list.
CAH stock has paid a regular dividend since 1985, and while the payouts aren’t amazing at 1.9%, there is significant room for improvement with dividends at just 35% of this year’s estimated earnings. Furthermore, that dividend has exploded from 6 cents quarterly in 2005 to 38.7 cents currently — a nearly 550% increase in just 10 years.
If you’re looking for dividend growth and stability, this medical products giant is a great place to put your money in 2015 regardless of what the market throws your way.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at [email protected] or follow him on Twitter via @JeffReevesIP.