The health care sector is a great source of dividend stocks. There are many health care stocks among the Dividend Aristocrats, which are companies that have raised dividends for 25 consecutive years.
You can see the entire list of all 50 Dividend Aristocrats here.
There are many reasons for this. First, large health care companies have highly profitable business models. Many have been in operation for decades, and have built strong brands over time.
Furthermore, consumers often do not have a choice when it comes to their health care. Many consumers have to continue taking medication and receiving health care, even when the global economy enters recession.
This provides pricing power, and insulates many health care companies from economic downturns.
And, the health care sector was virtually flat over 2016 while the S&P 500 as a whole posted double digit gains. This makes the sector a prime place to look for high quality dividend growth stocks.
There are a number of health care companies that use a portion of their profits to pay attractive dividends to shareholders, and grow those dividends over time.
The following stocks all rank highly using The 8 Rules of Dividend Investing. This article will discuss the top seven health care stocks to buy today.
Health Care Stocks – No. 7: Becton, Dickinson and Company (BDX)
Becton, Dickinson and Company manufactures medical supplies, which include diagnostics, infection prevention, surgical equipment, and diabetes management products.
The company benefits from a leadership position in its industry and structural growth due to the aging population. As a result, it has generated strong growth over the past five years.
Source: 2016 Analyst Day presentation, page 4
Becton, Dickinson and Company has a price-to-earnings ratio of 36 on a trailing basis. This might make the stock seem significantly overvalued, since the S&P 500 Index has an average price-to-earnings ratio of 26.
But on a forward-looking basis, the stock is much more reasonably valued. The company’s reported results over the past year include significant one-time charges that negatively affected its GAAP earnings-per-share.
For example, in fiscal 2016 Becton, Dickinson and Company incurred restructuring and integration costs that reduced its GAAP earnings-per-share by $526 million and $192 million, respectively.
These are non-recurring costs. On an adjusted basis, Becton, Dickinson and Company generated earnings-per-share of $8.59 in fiscal 2016. This was a very strong 20% year-over-year increase.
The stock is much more attractively valued using adjusted earnings-per-share. On this basis, the stock trades for a price-to-earnings ratio of 19. This indicates that the stock is actually undervalued compared with the S&P 500.
Going forward, the company projects 5% annual revenue growth and double-digit earnings growth from fiscal 2017-2019.
Revenue growth will be attained through growth in the emerging markets. Earnings-per-share growth will be achieved with a combination of revenue growth and cost cuts.
Source: 2016 Analyst Day presentation, page 12
Becton, Dickinson and Company has been very successful at expanding profit margin over the past several years. Operating margin expanded by 200 basis points in fiscal 2016, and management expects another 175-225 basis point expansion in fiscal 2017.
Operating margin expansion was fueled by global scale, automation, and business process enhancements.
This has led to excellent free cash flow generation. From fiscal 2012-2015, the company generated $5 billion of free cash flow. Going forward, the company projects $8 billion of free cash flow from fiscal 2016-2019.
With its steady earnings growth, the company has raises its dividend each year. Becton, Dickinson and Company has raised its dividend for 45 consecutive years, including a recent 10.6% increase.
As a result, Becton, Dickinson and Company is a Dividend Aristocrat.
The stock has a below-average dividend yield, of 1.8%. But it makes up for this with high dividend growth.
No. 6: Medtronic PLC (MDT)
Medtronic is a global medical device company. It operates four business segments:
- Cardiac and vascular (35% of sales)
- Restorative therapies (25% of sales)
- Minimally invasive therapies (34% of sales)
- Diabetes (6% of sales)
The company is enjoying broad-based growth over its current fiscal year.
Source: Q2 Earnings presentation, page
For example, the cardiac and vascular and restorative therapies segments each generated 1% revenue growth over the first half of the year.
Meanwhile, minimally invasive therapies and diabetes revenue each increased 2% in the same period.
Most of the growth is coming from the international regions, and in particular the emerging markets. Medtronic’s U.S. revenue declined 1% through the first six months of the year.
By contrast, revenue in the emerging markets has grown at a much faster rate across Medtronic’s product portfolio.
In the same six-month period, emerging market revenue increased 9% in cardiac and vascular, 10% in minimally invasive therapies, and 15% in diabetes.
Two markets in particular are especially attractive for future growth. China, Medtronic’s largest emerging market, grew revenue by 11% last quarter. Growth was due to double-digit growth in minimally invasive therapies and diabetes.
The other key market is Russia, where revenue grew over 20% as a result of strong momentum in the cardiovascular and minimally invasive therapy groups.
Moving forward, one area Medtronic is targeting for future growth is diabetes. Medtronic does have a presence in this therapeutic area, but it is by far its smallest operating segment.
Source: Jefferies Diabetes Summit presentation, page 4
This should be a very good year for Medtronic. The company expects fiscal year 2017 revenue growth to rise in the mid-single digit range on a constant currency basis. Earnings-per-share are expected to grow double-digits.
Much of this is due to the company’s acquisition of Covidien. Acquisitions added 120 basis points to revenue growth last quarter. And, the acquisition will provide a significant boost to operating margin, which expanded by 150 basis points year-over-year.
Medtronic is on track to realize $225-$250 million of cost savings in the current fiscal year. Moving forward, the company expects $850 million of synergies by the end of the fiscal 2018.
Medtronic is a great stock for investors who are looking for a combination of an above-average yield and high dividend growth.
The stock has a 2.4% current dividend yield. Furthermore, Medtronic recently increased its dividend by 13%. Medtronic is a Dividend Aristocrat, and has increased its annual dividend payment for the past 39 consecutive years.
No. 5: Abbott Labs (ABT)
Abbott Labs has approximately 74,000 employees and its products are sold in more than 150 countries around the world.
The company operates four segments:
- Nutrition (33% of sales)
- Diagnostics (23% of sales)
- Established Pharmaceuticals (19% of sales)
- Medical Devices (25% of sales)
Abbott has been extremely successful at creating shareholder wealth over the long term. It has achieved this through a balanced business model, both in terms of product focus and geographic markets.
Source: JP Morgan Healthcare Conference, page 3
Abbott enjoys a dominant position across its core operating businesses. For example, it is the number one company in adult nutrition, as well as in pediatric nutrition. And, it has the number one blood screening business.
It is leveraging its strong brands to pursue a significant portfolio transformation. For example, the company recently sold its medical optics business for $4.3 billion.