3 Healthcare Stocks For Dividend Growth
Healthcare stocks usually generate excessive free cash flows, as their drugs enjoy patent protection for many years. They are also resilient to recessions, as consumers do not reduce their healthcare expenses even under the worst economic conditions.
As a result, some healthcare stocks have decades-long dividend growth streaks and hence they are suitable for income-oriented investors, particularly given that their stock prices are usually less volatile than the broad market thanks to their robust business model.
In this article, we will analyze the prospects of three high-quality healthcare stocks, which are primed to continue growing their dividends for many more years.
Johnson & Johnson (JNJ)
Johnson & Johnson is a high-quality Dividend King, which has raised its dividend for 59 consecutive years. Most investors know the company for its consumer products but these products generate just 17% of the total sales of the company. The pharmaceutical segment is by far the most profitable segment of the company, as it generates approximately half of the total revenues and 75% of the earnings of the company. Medical devices generate 34% of total revenues.
Johnson & Johnson has 28 brands/pharmaceutical platforms that generate more than $1B in annual revenues. The company has a dominant position in its markets, as it generates approximately 70% of its sales from the Nr 1 or Nr 2 market share position. In addition, it is Nr 5 in the U.S. and Nr 8 globally in the total amount spent on R&D expenses.
Johnson & Johnson grew its adjusted operational earnings for 36 consecutive years until last year, when the pandemic caused a mild 7% decrease in its earnings per share. This is certainly an admirable growth record. The decline was inevitable last year, as the pandemic led many patients to postpone their surgeries and demand for medical devices decreased.
However, the pharmaceutical giant has returned to growth mode this year. In the third quarter, its pharmaceutical sales grew 14% and thus extended their double-digit growth streak, primarily thanks to strong trends in oncology and immunology. Total revenue grew 11% over last year’s quarter and adjusted earnings per share grew 18%, from $2.20 to $2.60, thus exceeding the analysts’ consensus by $0.40. Thanks to the sustained business momentum in its pharmaceutical segment and its medical devices, Johnson & Johnson is on track to grow its earnings per share by about 22% this year, to a new all-time high.
Johnson & Johnson has essentially doubled its earnings per share over the last decade. Thanks to its exemplary R&D division, the pharmaceutical giant is likely to keep growing its earnings per share at a meaningful rate for many more years. The stock is offering a 2.6% dividend, which has a wide margin of safety thanks to the healthy payout ratio of 43% and the rock-solid balance sheet of the company. Investors should rest assured that Johnson & Johnson will continue raising its dividend for many more years.
Novartis AG (NVS)
Novartis is a pharmaceutical giant that is headquartered in Switzerland. It researches, develops, manufactures and markets healthcare products worldwide. It operates in two segments, namely Innovative Medicines and Sandoz. Innovative Medicines includes prescription medicines for patients and healthcare providers. Sandoz includes the generic drugs of Novartis, i.e., the drugs manufactured after the expiration of the patent of the prototypes.
The growth driver of Novartis has been its Innovative Medicines segment, whereas its Sandoz business has been facing intense competition and pricing pressure for several quarters in a row. Sandoz was also hit by the pandemic last year, as the lockdowns and social distancing measures caused a historically low cough and cold season. Despite that headwind, Novartis achieved record earnings last year thanks to its robust innovative business.
Moreover, the strong momentum has remained in place this year. In the third quarter, Novartis grew its revenue 6%, to $13.0 billion, and its earnings per share 12.5%, from $1.52 to $1.71, and exceeded the analysts’ consensus by $0.05. The strong performance resulted from 9% volume growth in innovative medicines, slightly offset by lower prices, just like in the preceding quarter. The sales of Sandoz fell 2% due to sustained pricing pressure and thus continued to exert a drag on the overall performance. Nevertheless, thanks to the positive momentum of its innovative medicines, Novartis is on track to grow its earnings per share by approximately 9% this year, to a new all-time high.
Novartis has consistently grown its earnings per share over the last decade, at a 4.8% average annual rate. Given the reliable growth trajectory of its innovative division, the company is likely to keep growing its bottom line at a mid-single-digit rate in the upcoming years.
Moreover, the stock has raised its dividend (in CHF) for 25 consecutive years. It is also offering an attractive 4.0% dividend, which has a wide margin of safety, given the solid payout ratio of 51%, the healthy balance sheet of the company and its reliable growth prospects. Overall, investors can lock in the 4.0% dividend yield of the stock and rest assured that the dividend will remain on the rise for many more years.
Becton, Dickinson & Co. (BDX)
Becton, Dickinson & Co., or BD, is a global leader in the medical supply industry and operates in three segments. The Medical division includes needles for drug delivery systems and surgical blades. The Life Sciences division provides products for the collection and transportation of diagnostic specimens. The Intervention segment includes several of the products that were previously produced by Bard.
Even under the most adverse economic conditions, the demand for medical devices and other healthcare products remains robust. As a result, BD has proved resilient to recessions. This is clearly reflected in the consistent growth record of the company. BD grew its earnings every single year in the last decade, except for 2020 due to the pandemic. However, a 13% decrease in earnings per share during one of the fiercest recessions in history is undoubtedly benign.
Moreover, the company has already recovered strongly from the pandemic. In its fiscal 2021, which ended in September, BD grew its revenue 18% and its earnings per share 28%, to a new all-time high. The strong performance resulted primarily from COVID-19 testing devices and positive trends in the medical segment.
BD raised its dividend by 5% this month and thus it became a Dividend King, with 50 consecutive years of dividend growth. The company has proved resilient to recessions and has a payout ratio of only 28%. As a result, its dividend has a wide margin of safety and hence the company can easily keep raising its dividend for many more years. On the other hand, due to the low payout ratio, the current dividend yield is only 1.4%. Therefore, the stock is attractive mostly for its reliable growth trajectory, not for its dividend.
Final thoughts
The above three healthcare stocks have enviable dividend growth records and will easily keep raising their dividends for many more years thanks to their promising growth prospects, their healthy payout ratios and their resilience to downturns. These stocks are also characterized by lower price volatility and thus they make it easier for their shareholders to retain their shares during bear markets. Overall, Johnson & Johnson, Novartis and BD are great candidates for the portfolios of income-oriented investors.
Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...
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