Investors have always looked at exposure to healthcare stocks for a defensive portfolio. In general, the industry is not prone to cyclical swings with the stocks having a low beta. With the spread of the novel coronavirus, healthcare stocks have grabbed the limelight.
The rush to develop a vaccine for the coronavirus has translated into investor interest in several names. At the same time, companies providing sanitizers and protective personal equipment have been in focus.
As one column from Harvard Business Review suggests, the coronavirus has exposed the deficiencies in the U.S. healthcare system. Once the current crisis is navigated, there will be bigger investments in the healthcare sector to cover the deficiencies. This is likely to be positive for healthcare stocks.
Let’s discuss few healthcare stocks that can deliver robust returns in the coming years.
Johnson & Johnson (JNJ)
With strong presence in consumer health, pharmaceuticals and medical devices, Johnson & Johnson is attractive for long-term investors. In the recent past, JNJ stock has been sideways and I see this as a good opportunity to accumulate.
In the near-term, a potential stock upside trigger is the company’s efforts towards a COVID-19 vaccine. The company expects clinical trials to begin in the second half of July. Any success can send JNJ stock soaring. If the progress is smooth, the expectation for the first batch is in the first quarter of fiscal year 2021.
Besides the vaccine, I am bullish on the company’s pharmaceutical business. The segment delivered strong growth in Q1 2020 in the U.S. and internationally. With a deep pipeline of drugs for approval, the strong growth trajectory is likely to sustain.
It’s worth noting that the company’s medical devices segment reported negative growth in Q1 2020. However, in the long-term I am bullish. The current crisis has highlighted the deficiencies in the healthcare system globally. As investments increase in the sector, the medical devices segment is likely to be a beneficiary.
Besides the business growth factor, the company generated free cash flow of $3 billion for Q1 2020. With an annualized FCF of $12 billion, the company will continue to create value through dividends and share repurchase.
Further, the company invested $2.6 billion in research and development in the latest quarter. Strong R&D investments will translate into future growth. Overall JNJ stock is attractive and among the top picks in the healthcare sector.
AstraZeneca is another interesting pharmaceutical stock to consider. One reason is that the company is among the front-runners in the COVID-19 vaccine development. AstraZeneca has tied-up with Emergent BioSolutions (NYSE:EBS) for manufacture of COVID-19 vaccine in the U.S.
Furthermore, the company has also partnered with the University of Oxford for “broad and equitable global access” to the coronavirus vaccine. These developments related to the vaccine will keep the AZN stock in focus through the year and into FY2021.
Besides this, AstraZeneca has already seen strong top-line growth. For Q1 2020, the company’s revenue increased by 17%. With a strong pipeline of drugs, the growth momentum is likely to sustain. As an example, the company reported $1 billion in incremental revenue for Q1 2020 on a back of new medicine launches. As of Q1 2020, the company reported 17 Phase III medicines.
It’s also worth noting that the company’s growth outside the U.S. has been robust. China and other emerging markets will continue to drive growth in the coming years.
AZN stock currently has a dividend pay-out of $1.40. As growth sustains, I expect higher dividends. This is another reason to be positive on the stock.
3M Company (MMM)
MMM stock is also worth considering for a long-term portfolio. As coronavirus cases continue to surge in countries like Russia, India, and Brazil, the demand for N95 masks is likely to remain strong. The company has already committed to double the N95 respirator output to 100 million per month.
However, this is not the only reason to be bullish on 3M. The company’s business segments include healthcare and consumer division. In the healthcare segment, the company is focused on food safety, drug delivery, and oral care, among others. With higher awareness of infections and hygiene, these segments are likely to witness strong growth.
Even in the consumer segment, the company’s focus is on home improvement, home care, and consumer health care. After the coronavirus is contained, products in these segments are likely to see higher interest among consumers.
3M Company is also a quality dividend stock. The company currently has an annualized dividend of $5.88. I expect dividend growth in the coming years as cash flows swell.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.