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The United States healthcare sector is attractive for long-term buy-and-hold investors because the industry is set to benefit from a major growth tailwind—the aging population. America is an aging country with a substantial 65+ population. This suggests demand for healthcare will only grow in the future at a rate above GDP growth.

The opportunity for investors is the many blue-chip stocks in healthcare, which will provide shareholders with long-term growth and dividends. These 3 undervalued healthcare stocks in 2023 are attractive today for their attractive valuations and total return potential.

Bristol-Myers Squibb (BMY)

Bristol-Myers Squibb is a leading drug maker of cardiovascular and anti-cancer therapeutics, with annual revenues of about $47 billion. The company’s competitive advantage is its ability to create through research & development or acquire patents for pharmaceuticals with high potential revenue. Bristol-Myers’ top three selling pharmaceuticals, Revlimid, Opdivo, and Eliquis, have shown solid growth rates and are expected to see high peak annual sales.

In the 2023 second quarter, revenue fell 5.8% to $11.2 billion, while adjusted earnings-per-share came to $1.75. Considering unfavorable currency exchange, revenue was down 5% for the quarter. U.S. revenues declined 5% to $7.9 billion. Much of the decline was due to generic competition for Revlimid, down 41% to $1.2 billion. 

Future growth catalysts include Eliquis, which prevents blood clots and has become the top oral anticoagulant in several international markets since 2019 and had nearly $12 billion in revenue for 2022, a 10% increase from the prior year. 

Overall, Bristol-Myers has seen earnings-per-share grow at 19.6% per year over the last decade, but much of this growth has occurred over the past four years. Due to the somewhat unpredictable nature of the company’s results, we project 3% growth through 2028.

Dividend and Valuation

Bristol-Myers has increased its dividend at a CAGR of 4.9% since 2013. The trend had been that shareholders receive a $0.01 dividend-per-quarter raise each year. However, that was broken over the past few years. We project 5% dividend growth annually over the next five years.

We expect 3% annual EPS growth over the next five years for BMY. The stock also sports a dividend yield of ~3.7%. The stock has a low dividend payout ratio of 30%, which indicates a safe dividend. BMY stock trades for a 2023 P/E ratio of 8.3X, much lower than our fair value P/E of 13.5X. Future annual total returns, estimated by the sum of dividend yield, earnings growth, and P/E expansion could exceed 16% per year over the next five years.

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CVS Health Corporation (CVS)

CVS Health Corporation is an integrated healthcare services provider that operates a pharmaceutical services business along with the country’s largest chain of pharmacies. The company operates more than 9,900 retail locations, 1,100 medical clinics, and services more than 102 million plan members. CVS Health Corporation generates annual revenues of about $323 billion.

In the 2023 second quarter, revenue was up 10.3% to $88.9 billion, beating estimates by $2.39 billion. Adjusted earnings-per-share of $2.21 compared to $2.53 in the prior year but was $0.09 ahead of expectations. Revenues for Health Services, formerly Pharmacy Services, grew 7.6% for the quarter. Revenues for the Pharmacy & Consumer Wellness segment, formerly the Retail/LTC segment, increased 7.6% as prescriptions filled grew 1.1% to 405.7 million. Excluding Covid-19 vaccines, prescriptions grew 4.9%, while front-store sales were up 1.0%. 

Aetna continues to be a growth driver. Revenues for Health Care Benefits improved 17.6%, and total memberships were up 4.9% to 25.6 million. Government memberships grew 6.8% from the prior year, while commercial was higher by 0.6%. 

CVS Health Corporation also reaffirmed its previous outlook for 2023, with the company still expecting revenue to range from $348 billion to $353 billion, up from $332.7 billion to $338.5 billion. Adjusted earnings-per-share are still projected to be $8.50 to $8.70 for the year.

CVS Health Corporation’s most compelling competitive advantage is its entrenched position in the pharmaceutical retail industry. CVS Health Corp controlled 26.8% of the retail pharmacy market share as of the most recent quarter.

Valuation

We expect CVS to generate adjusted EPS of $8.60 in 2023 and grow its adjusted EPS by 6% per year over the next five years. The stock has a 2023 P/E of 7.8X, with a current dividend yield of 3.6%. Total returns could exceed 16% through 2028.

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Organon & Co. (OGN)

Our third undervalued healthcare stock in 2023 is Organon. It was spun off from its former parent company, Merck & Company (MRK). Organon is a pharmaceutical company. Its established brand portfolio consists of close to 50 products that have lost patent exclusivity and are employed for treating cardiovascular, respiratory dermatology, and non-opioid pain management indications. 

Organon’s women’s health portfolio includes fertility and contraception brands, such as Nexplanon/Implanon and Nuva Ring. The firm also has a small portfolio of biosimilars used in immunology and oncology. 

In the 2023 first quarter, revenue of $1.61 billion was 1.3% higher than the prior year and $51 million better than expected. Adjusted earnings-per-share of $1.31 compared favorably to $1.25 for the previous year and was $0.32 above estimates. Excluding the impact of currency exchange, revenue was up 4% for the period. 

For the quarter, Established Brands, which contributed 62% of quarterly revenue, fell 2% as volume gains in Arcoxia were offset by weakness in select injectable steroids. Offsetting this was Women’s Health, which contributed ~27% of sales and grew revenue by 8% due to increased demand for long-acting contraceptives and gains in the fertility portfolio. Sales for Biosimilars grew 14% due to improvements in volume in the U.S. and Canada. 

Given the unknowns of the company at this point, we are comfortable forecasting earnings-per-share growth of 3% through 2028. Organon does have several factors working in its favor for future growth. The established brands business should provide Organon with solid cash flows as the off-patent products don’t require much research and development expenses. 

Separately, while biosimilars are the smallest portion of the new company, Organon does expect to expand its portfolio, including a biosimilar to Humira for the U.S. market starting in 2023.

Valuation

Shares of OGN trade for a 2023 P/E ratio of 5.0X, compared with our fair value P/E ratio of 7.0X. The stock also has a 5.1% dividend yield, leading to total expected returns above 13% per year over the next five years for OGN.

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