As Congress debates the merits of the American Health Care Act (AHCA), investors are increasingly worried about healthcare stocks and the effect the pending legislation could have on American pocketbooks. And Tuesday’s unnerving dip illustrated that failure to pass healthcare legislation soon could have farther-reaching consequences across several other sectors.
Right now, though, investors have more questions than answers.
For example: What makes certain healthcare stocks low-risk investments? That’s not an easy answer given the potential changes coming to the healthcare system and how we pay for it.
“This bill would weaken Medicare’s fiscal sustainability, dramatically increase health care costs for Americans aged 50-64, and put at risk the health care of millions of children and adults with disabilities, and poor seniors who depend on the Medicaid program for long term services and supports and other benefits,” wrote the American Association of Retired Persons (AARP) in a recent letter to Congress.
Any number of groups could be hit extremely hard by the pending legislation. As a result, identifying healthcare stocks to buy has become a bit of a crapshoot.
For me, the best healthcare stocks are those that do well in any economic environment, are financially stable, have little debt, are growing the top and bottom lines, and if possible, pay a healthy dividend but don’t overdo it.
Based on these criteria, here are my picks for the seven best low-risk healthcare stocks to buy.
Best Healthcare Stocks to Buy: Intuitive Surgical (ISRG)
Intuitive Surgical, Inc. (NASDAQ:ISRG), the maker of da Vinci robotic surgery systems, doesn’t pay a dividend, but it does do something for shareholders that matters even more — it makes money by the boatload, which drives ISRG stock consistently higher.
In the past three years, it has achieved an annual total return of 19.7% — 560 and 919 basis points higher than its peers in the medical devices industry and the S&P 500, respectively.
If you’re looking for financial stability, Intuitive Surgical hasn’t lost money at any time in the past decade while growing revenues from $601 million in 2007 to $2.7 billion in 2016. Only in 2014 did it have a decline in year-over-year revenues. Meanwhile, operating margins stayed between 66% and 73%, with earnings per share growing 19.75% compounded annually.
On a valuation basis, you might think ISRG stock is a little expensive at 32 times forward earnings, but with $4.8 billion in cash and no debt, it’s strong enough to withstand anything the AHCA throws at it.
Best Healthcare Stocks to Buy: Dentsply Sirona (XRAY)
Healthy teeth are an important part of one’s health and well-being. Avoiding the dentist might give you short-term stress relief, but in the long-term, it will end up costing you.
At the end of 2015, Dentsply and Sirona merged as one to create Dentsply Sirona Inc (NASDAQ:XRAY), one of the world’s largest manufacturers of dental and oral health products with $3.7 billion in annual revenue in 2016 and $454 million in operating income.
Sirona’s claim to fame is in dental imaging, while Dentsply has been big in dental consumables; together, the combined entity will work to capture a bigger piece of the dental profession pie. XRAY is expected to throw off the shackles of integrating two companies in the second half of 2017, and move forward with its global ambitions.
I like the fact that Dentsply pays out just 16% of its earnings as dividends. This means it’s using its $437 million in free cash flow in 2016 for more important things like bolt-on acquisitions to complement its existing products while reducing its debt, which is already a low 13% of total assets.
Best Healthcare Stocks to Buy: Edwards Lifesciences (EW)
If you’ve got heart problems, there’s a good chance that you’ve been around Edwards Lifesciences Corp (NYSE:EW) and some of its products, which include transcatheter aortic valve therapy (TAVR) and other less invasive treatments of aortic stenosis — one of the most common valve-related heart diseases affecting the aging population.
Right now, the global TAVR market is approximately $2.5 billion in size; by 2021, it’s expected to double to $5 billion. Beyond that, the growth in this market will be tremendous as new therapies and products are developed by Edwards to treat younger, healthier patients before heart damage permanently sets in.
To continue driving revenues higher, Edwards spends 16% to 17% of its sales on research and development, which goes toward further expansion into the TAVR market, as well as its other core businesses.
In 2017, Edwards expects adjusted earnings per share of at least $3.30 on 10% to 14% revenue growth. While it doesn’t pay a dividend, EW stock has achieved double-digit total returns in seven out of the past 10 years.
With strong margins and net cash of $449 million, EW is among the best healthcare stocks to buy for the long-term.
Best Healthcare Stocks to Buy: Baxter (BAX)
2016 was a transformative year for Baxter International Inc (NYSE:BAX).
Best-known for its renal care technologies and intravenous solutions, BAX sold off 80.5% of its Baxalta biopharmaceutical business to existing shareholders on a one-for-one basis in 2015. The remaining 19.5% was disposed of through a number of different transactions including contributing 17.1 million Baxalta shares to its U.S. pension plan. Baxalta was subsequently acquired by Shire PLC (ADR) (NYSE:SHPG) in June 2016 for $32 billion.
The most important aspect of hiving off its Baxalta business was that Baxter gained a greater focus on its core businesses while generating $4.4 billion in after-tax profits, which it used to repay $3.7 billion in debt and repurchased 11.5 million shares.
Today, BAX is a much leaner business with $2.8 billion in long-term debt — 29% less than at the end of 2015 — along with an equal amount of cash. That’s a significant improvement over fiscal 2015 when it had net debt of $1.7 billion.
More importantly, although Baxter’s 2016 revenue of $10.1 billion was 5.2% less than in 2014 when it still owned Baxalta, its total segment EBITDA was $3 billion — $73 million higher than in 2014. So BAX was making more from less.
Investors should expect Baxter’s dividend to grow at a reasonably healthy pace over the next few years as its free cash flow returns to historical levels in the billions, not hundreds of millions as is currently the case.
Best Healthcare Stocks to Buy: Zoetis (ZTS)
Americans spent $60.3 billion on their pets in 2015. Estimates for 2016 were about $2.5 billion more.
As someone who owns four elderly cats, I know all about spending on pets, especially expenditures related to healthcare. People today are less likely to say no to necessary healthcare procedures for their pets because we don’t have as many child-related expenses given the birthrate is at near-record lows.
Zoetis Inc (NYSE:ZTS) has over 60 years in the animal health business, so it’s directly benefiting from this trend and will continue to do well as long as pet owners continue to love their animals. However, the ace in the hole for Zoetis is the fact that it actually generates 59% of its revenue from farm animals, compared to 40% from companion animals like dogs and cats.
Providing medicines and vaccines for beef and dairy cattle, fish, pigs, poultry and sheep, Zoetis helps keep our food supply healthy; with a growing population that’s expected to put significant strain on the global food supply in the years ahead, Zoetis’s products will only become more important to the planet.
In the past three years, Zoetis has increased its dividend rate from 20 cents annually to 38 cents, almost 100% growth. Yes, it only yields 0.8%, but it’s the growth that really counts. And with operating margins of almost 29%, the dividend increases will keep on coming.
Just keep in mind that Zoetis’ long-term debt is high at 58% of its total assets.
Best Healthcare Stocks to Buy: Johnson & Johnson (JNJ)
If you’re looking for low-risk healthcare stocks, you can’t do any better than Johnson & Johnson (NYSE:JNJ), which in January announced it was paying $30 billion to buy Actelion Ltd (OTCMKTS:ALIOF), the Swiss-based maker of Tracleer, Uptravi and Opsumit.
After acquiring the company, it will spin off Actelion’s R&D division into a separate company; Johnson & Johnson will own 16% of it.
JNJ paid less than 10% of its $345 billion market cap, or 21% of its $140 billion in total assets. It can easily afford this transaction, which adds 35-40 cents per share in earnings in its first full year, plus the value added gained from the new R&D company.
Johnson & Johnson had $71.9 billion in revenue in 2016 — an operational increase of 7.4% — which generated adjusted earnings per share of $6.73. Its U.S. business, which accounts for slightly more than 50% of revenue, definitely was driving the JNJ bus in 2016.
With $15.5 billion in free cash flow in 2016, the $8.6 billion in dividends it paid out seems like chump change. That’s why year in, year out, JNJ ups the dividend around 7% or more and has done so for 54 years in a row.
If you’re looking for low-risk, JNJ stock is about as risk-free as you get.
Best Healthcare Stocks to Buy: Bristol-Myers Squibb (BMY)
Last summer, Bristol-Myers Squibb Co (NYSE:BMY) stock was trading around $75; today, it’s around $56 as of the March 21 close — a 25% decline in its value.
Can you say value?
Carl Icahn thinks so. In February, investors learned that the activist investor has taken a big stake in the company. He’s not the first activist investor to shake Bristol-Myers’s tree, but he’s definitely the biggest … and loudest.
The talk is that Icahn wants to see BMY sold to somebody who can get its promising pipeline of cancer drugs across the finish line. Currently, Bristol-Myers has a market cap of $93.2 billion; last summer it was worth as much as $125 billion ($75 per share times 1.67 billion shares outstanding).
With its 2016 revenues up 17% to $19.4 billion on the back of strong global sales of Optivo ($3.8 billion, up 303% from 2015), its top cancer drug, along with several others experiencing double-digits growth including Eliquis, its cardiovascular drug, it appears it’s worth taking the 2.8% dividend yield until Icahn does his thing.
While no drug stock is risk-free, the fact that Icahn is involved suggests BMY could be back at $75 in no time.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.