During periods of market weakness, such as in 2022, healthcare stocks tend to outperform the broader market. This is owed to the group’s relative stability when it comes to revenue and earnings, which also translates to their ability to pay dividends irrespective of economic conditions.
But not all healthcare stocks are created equal. Let’s take a look at three that we like for attractive dividends today, as well as long-term growth potential. These stocks are good picks whether we have a recession in 2023 or not, as they should provide a diversifying component to an investor’s portfolio.
Our first stock is Pfizer (NYSE:PFE), a global pharmaceutical company that discovers, develops, manufactures and distributes a wide variety of medicines and vaccines. The company has a long slate of pharmaceuticals that treat, among others, cardiovascular, metabolic, Covid-19, pneumococcal disease, inflammatory disease, hemophilia, and endocrine diseases.
Pfizer was founded in 1849. It should produce about $100 billion in revenue in 2022 and has a current market capitalization of $287 billion.
Pfizer’s current dividend increase streak is 13 years. That isn’t among the longest streaks by any means, but it is long enough that the company has weathered a couple of weak economic periods and continued to raise the payout.
The stock is yielding 3.2% today, which is roughly in line with its historical norms. That also puts it at about two times that of the S&P 500, so Pfizer is a true income stock.
What makes it all the more attractive is that the payout ratio is just 25% of this year’s earnings. That means the dividend is ultra-safe, even in the event of a harsh recession. Not only that, but it leaves ample room for future increases as well, as Pfizer’s research and development (R&D) needs are well covered by earnings and cash flows.
We project 5% annual earnings per share growth in the coming years, meaning not only that Pfizer should see its share price move higher over time but also that the company has additional capital for dividend raises. We believe the company will raise its dividend indefinitely.
Shares trade under eight times this year’s earnings, which is well under our estimate of fair value at 11 times. When combining the potential tailwind from the valuation, the 3.2% yield and 5% projected growth, we get a total annual return potential of about 14%. As such, we rate Pfizer a buy for both income and price appreciation.
Next on our list of healthcare stocks is Medtronic (NYSE:MDT). The company develops, manufactures and distributes medical devices to hospitals, doctors, clinics and patients worldwide. Medtronic stock has declined 25% year-to-date (YTD), making it a value pick among healthcare stocks.
Medtronic produces cardiovascular products, such as pacemakers, defibrillators, monitoring systems and more. It also has a medical surgical portfolio that offers stapling devices, sealing and closure instruments, mesh implants, ventilation therapies and related products. The neuroscience business offers products for various types of surgeries, as well as imaging system robot-assisted spinal procedures and others.
Medtronic was founded in 1949. It produces about $30 billion in annual revenue and has a current market cap of $103 billion. It has an extremely impressive dividend increase streak of 45 years, putting it in elite company. That also means Medtronic has stood the test of time and economic weakness. It has raised its dividend through all kinds of market conditions.
Shares yield 3.5% today as well, which is more than double the S&P 500. It’s also very high by Medtronic’s own historical norms, which have seen the stock typically yield about 2%. That means the dividend offers exceptional value today for buyers of the stock.
Medtronic’s payout ratio is just over half of earnings this year, which is somewhat elevated against historical tendencies. The company has seen somewhat choppier earnings in the past handful of years, but the dividend is quite well covered nonetheless.
Speaking of earnings, we expect 6% growth going forward for Medtronic, which should be driven mostly by revenue improvements, as well as some margin expansion associated with it. Finally, the company is buying back a robust number of shares and boosting EPS as a result.
With the stock trades under 15 times earnings, versus a fair value estimate of 17 times earnings, Medtronic also offers potential capital appreciation from a rising valuation. When we combine this tailwind with the 3.5% yield and 6% growth, we project total annual returns of about 12%.
UnitedHealth Group (UNH)
Our final pick for this list of healthcare stocks is UnitedHealth (NYSE:UNH), a diversified healthcare company that operates in the U.S. It operates through four segments: UnitedHealthcare, Optum Health, Optum Insight and Optum Rx. Through these segments, UnitedHealth has one of the largest healthcare businesses in the world. It offers a huge variety of products. Additionally, the company offers health benefit plans and services for employers of all kinds through its UnitedHealthcare business, as well as individuals. The Optum business collectively offers health management services, software and advisory services, and pharmacy care and medication fulfillment, among others.
UnitedHealth was founded in the late 1970s. It generates about $325 billion in annual revenue and trades with a market cap of $500 billion.
Like Pfizer, UnitedHealth has a relatively modest dividend-increase streak of 13 years. However, the company has proven to be willing and able to raise its dividend at very rapid rates over time, and we find it to be one of the best dividend growth stocks available today.
The yield is modest at 1.2%, owed to the stock’s massive run it has experienced in recent years. That has made it such that the dividend has had a difficult time keeping pace with the share price. Still, the payout ratio is just 30% for this year, and we expect to see very strong dividend growth for many years to come.
Not only is the payout ratio low, but we forecast 12% EPS growth in the years to come, meaning ample capital should be available to the management team. The company’s ability to generate revenue growth year after year has turned it into not only a great dividend stock but also a great stock to own for capital appreciation.
In total, we expect to see about 9% total returns for UnitedHealth.
On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.