Finding Value In The S&P 500: 9 Healthcare Dividend Growth Stocks: Part 1 by Chuck Carnevale, F.A.S.T. Graphs
Introduction
Most everyone would agree that the stock market as measured by the S&P 500 is not cheap today. However, there might be a great deal of disagreement regarding precisely how overvalued the S&P 500 currently is. Nevertheless, I would agree that in the general sense, stocks are not exactly bargains today. This might especially be true regarding best-of-breed blue-chip dividend growth stocks. Low interest rates have enhanced the attraction for high-quality dividend paying stocks.
On the other hand, suggesting that the S&P 500 is fully valued or even overvalued, is not the same as saying that all stocks in the S&P 500 are overvalued. As I’ve often stated, I believe it is a market of stocks and not a stock market. Additionally, I would also confidently state that it is also a market of various sectors as well. In this regard, there will be times when certain sectors are in favor while others are out of favor. Consequently, even in an overheated market, it is not unusual to find companies in specific sectors that are out of favor at the same time. Furthermore, this would also apply to certain companies in various subsectors within the larger sector.
The bottom line for me is that I never make individual common stock investment decisions based on where I think the level of the overall market is. Instead, I believe in looking for value when and wherever I can find it. Since I believe in building a stock portfolio one company at a time, it logically follows that I also believe in analyzing stocks one company at a time. Simply stated, I invest based on my determination and evaluation of the fundamental value I would be receiving from investing in the individual company I am scrutinizing.
The Commonsense Benefits of Sound Valuation
Long-running bull markets, like the one we have been experiencing over the past 7 or 8 years, has a tendency to elicit overconfidence and even complacency. The longer stocks go up, the more confident people tend to become. This concept has recently hit home with me by reading startling comments by dividend growth investors that I highly respect. For example, several comments have promoted and supported the notion that the strong just keep getting stronger. They use this refrain to justify a willingness to pay high valuations for best-of-breed dividend growth stocks. I believe this is a serious mistake for reasons I will next present.
The concept of only being willing to invest in even the greatest of companies at or below sound valuation is mathematically supported. For starters, with any given amount of money, you will purchase more shares of a great company at a lower valuation than you will at a higher valuation. Owning more shares over the long run will lead to more dividend income and greater capital appreciation.
Moreover, when you invest at lower valuations, each share that you purchase will have a higher current dividend yield than had you purchased it at a higher valuation. So not only do you get more shares at lower valuations, each share also provides you a higher current yield. In the long run, this pays off handsomely, in addition to simple math, it is also common sense. On the other hand, in matters of investing, common sense is often not all that common.
But most importantly, the willingness to overpay for even the best company either ignores or denies the inevitable reality that a company’s stock price will eventually move into alignment with fundamental value. In other words, when a stock is undervalued based on fundamentals, it will inevitably move up to fundamental value – and vice versa. Consequently, to me at least, it seems prudent and intelligent to only invest in any company, no matter its quality, at times when its valuation is sound and attractive.
The reader should note the use of the plural “times.” In other words, I am not suggesting perfect timing because I consider that virtually impossible. Instead, there will be a period or periods of time when a stock is valued at sound levels. However, over those periods of time there will still be volatility. Therefore, there will be short periods of time when valuation might get a little better or a little worse. In other words, a soundly valued stock could drop in price temporarily over the short run, or immediately rise a little in price. Nevertheless, the important point is that you initially purchased it at a sound valuation regardless of what happens over the short term. In the long run, this will work for your benefit as long as fundamentals remain intact.
9 Attractive S&P 500 Healthcare Dividend Growth Stocks
There are over 50 healthcare stocks in the S&P 500. However, there are numerous subsectors within the larger broader healthcare sector. Consequently, a little more than approximately 10% of the names in the S&P 500 are healthcare companies. However, that does not follow that 10% of the S&P 500 is comprised of healthcare. S&P 500 index is a weighted index.
Moreover, of the 50+ healthcare stocks in the S&P 500, they also come in many different flavors. Some are pure growth stocks, some are dividend growth stocks. Additionally, some offer higher yields and lower growth, while others offer lower yield and higher growth. My point being, that choices should be made according to the individual investor’s own goals and objectives.
With this article I will be sharing my preliminary research on 9 reasonably valued dividend paying S&P 500 stocks in the healthcare sector. However, I do want to point out that some of these names are attractive for their current yield, while others more for total return. Nevertheless, I leave it up to the reader to decide if any of these companies are worthy of conducting further research. The following portfolio review lists these 9 research candidates in order of highest dividend yield to lowest – and lists additional fundamental metrics and attributes on each:
F.A.S.T. Graphs and Fundamentals Underlying Numbers Review
The following earnings and price correlated F.A.S.T. Graphs and FUN Graphs on each of these 9 research candidates illustrate why I was attracted to learning more about these companies. First of all, I was interested in finding investable attractively valued dividend growth stocks in the healthcare sector. Whenever I am conducting preliminary research prior to a more comprehensive effort, there are certain fundamentals that I personally like to evaluate.
Of course, the relationship of stock price to earnings is my first check. If the stock appears reasonably valued on that basis, I am motivated and willing to dig deeper. Therefore, I offer an earnings and price correlated F.A.S.T. Graphs on each candidate.
When looking for dividend paying stocks specifically, I like to examine cash flow and free cash flow per share relative to dividends paid. This gives me a quick overview of how well the dividends are covered. Consequently, my second graph on each candidate provides a FUN Graph on each of these important metrics over the past five years.
Since I understand that I can learn from the past, but only invest in the future, I also find it useful to review consensus analyst estimates over the next few years and over the longer 3 to 5 year timeframe. Therefore, utilizing the “Custom” forecasting calculator I present a quick look at analyst expectations on each company.
Finally, since future profitability is what I’m most concerned with, I also like to examine gross and net profit margins and return on equity. Therefore, the final graph on each research candidate reviews those important metrics over the past 5 years. Although I will not do it for all of the following research candidates, I will interject appropriate commentary where I think it’s necessary.
AbbVie Inc (ABBV)
Below is a short business description courtesy of Morningstar:
“AbbVie Inc is a research-based biopharmaceutical company. The Company is engaged in the discovery, development, manufacture and sale of a broad line of pharmaceutical products for treating chronic autoimmune diseases, virology and neurological disorders.”
AbbVie is offered as a fairly valued high yield dividend growth stock. The only negative is the high debt-to-capital ratio. However, as seen below, the company produces strong cash flow and free cash flow more than adequate to cover its dividend and support its debt.
Cash Flow Per Share (cflps), Free Cash Flow Per Share (fcflps), Dividends Paid Per Share (dvpps)
Gross Profit Margin (gpm), Net Profit Margin (npm), Return On Equity (roe)
AmerisourceBergen Corporation (ABC)
Below is a short business description courtesy of Morningstar:
“AmerisourceBergen Corp is a pharmaceutical services company. It provides drug distribution and related healthcare services and solutions to pharmacy, physician, and manufacturer customers based in the United States and Canada.”
Cash Flow Per Share (cflps), Free Cash Flow Per Share (fcflps), Dividends Paid Per Share (dvpps)
Gross Profit Margin (gpm), Net Profit Margin (npm), Return On Equity (roe)
AmerisourceBergen saw the complete elimination of their net profit margin in 2015 due to non-recurring headwinds of acquisitions and a DOD settlement. However, adjusted operating results remained strong. FAST Graphs subscribers can see the effects of these headwinds by drawing a graph utilizing GAAP accounting (diluted earnings metric).
Amgen Inc (AMGN)
Below is a short business description courtesy of Morningstar:
“Amgen Inc is a biotechnology company that discovers, develops, manufactures and delivers human therapeutics. The Company’s business segment is human therapeutics.”
Amgen is moderately overvalued currently. However, it would only take a modest pullback for this stock to be attractive and sound.
Cash Flow Per Share (cflps), Free Cash Flow Per Share (fcflps), Dividends Paid Per Share (dvpps)
Gross Profit Margin (gpm), Net Profit Margin (npm), Return On Equity (roe)
Anthem Inc (ANTM)
Below is a short business description courtesy of Morningstar:
“Anthem Inc is a health benefits company offering a network-based managed care plans to the large and small employer, individual, Medicaid and Medicare markets.”
I believe that Anthem is currently undervalued due to the controversy surrounding their Cigna deal. However, I believe that risk is already reflected in the company’s low valuation.
Cash Flow Per Share (cflps), Free Cash Flow Per Share (fcflps), Dividends Paid Per Share (dvpps)
Gross Profit Margin (gpm), Net Profit Margin (npm), Return On Equity (roe)
Cardinal Health Inc (CAH)
Below is a short business description courtesy of Morningstar:
“Cardinal Health Inc is a healthcare services company. It provides pharmaceutical & medical products & services that help pharmacies, hospitals and other healthcare providers focus on patient care. It also provides medical products to patients in the home.”
Cardinal Health appears moderately overvalued, but only by a little. Consequently, even a small pullback would make this stock attractive, in my opinion. The reader should note that this represents a clear example of an overvalued stock moving back to fair value as previously discussed.
Cash Flow Per Share (cflps), Free Cash Flow Per Share (fcflps), Dividends Paid Per Share (dvpps)
Gross Profit Margin (gpm), Net Profit Margin (npm), Return On Equity (roe)
Gilead Sciences Inc (GILD)
Below is a short business description courtesy of Morningstar:
“Gilead Sciences Inc is a research-based biopharmaceutical company that discovers, develops and commercializes new medicines for different medical sectors.”
Gilead is offered based on the potential for a P/E expansion to more reasonable levels. However, the company’s growth prospects are very vague. Nevertheless, this biotechnology company is extremely cheap at these levels, regardless of future growth.
Cash Flow Per Share (cflps), Free Cash Flow Per Share (fcflps), Dividends Paid Per Share (dvpps)
Gross Profit Margin (gpm), Net Profit Margin (npm), Return On Equity (roe)
McKesson Corporation (MCK)
Below is a short business description courtesy of Morningstar:
“McKesson Corporation distributes pharmaceuticals, medical supplies and healthcare information technology that make healthcare safer while reducing costs. Its segments include McKesson Distribution Solutions and McKesson Technology Solutions.”
McKesson represents another example of the pitfalls of investing in a great company when it is overvalued. This company is overvalued for part of 2013, most of 2014, and into the late spring of 2015. However, the inevitable movement in price down to fair value and below was swift.
Cash Flow Per Share (cflps), Free Cash Flow Per Share (fcflps), Dividends Paid Per Share (dvpps)
Gross Profit Margin (gpm), Net Profit Margin (npm), Return On Equity (roe)
Perrigo Company plc (PRGO)
Below is a short business description courtesy of Morningstar:
“Perrigo Co PLC develops, manufactures and distributes over-the-counter and generic prescription pharmaceuticals, nutritional products and active pharmaceutical ingredients.”
Perrigo is offered as a potential P/E ratio expansion candidate. Although the company looks extremely undervalued based on its historical earnings growth, earnings growth more recently has faltered, which appears to be the source of the drop in stock price.
Cash Flow Per Share (cflps), Free Cash Flow Per Share (fcflps), Dividends Paid Per Share (dvpps)
Gross Profit Margin (gpm), Net Profit Margin (npm), Return On Equity (roe)
Universal Health Services Inc (UHS)
Below is a short business description courtesy of Morningstar:
“Universal Health Services Inc through its subsidiaries is engaged in the business of owning and operating acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers.”
Cash Flow Per Share (cflps), Free Cash Flow Per Share (fcflps), Dividends Paid Per Share (dvpps)
Gross Profit Margin (gpm), Net Profit Margin (npm), Return On Equity (roe)
Summary and Conclusions
With this article I’ve attempted to identify 9 S&P 500 healthcare constituents that appeared reasonably valued in today’s overheated market. I am personally conducting deeper research on each of the ones that I do not already have a position in. However, I believe it’s important that the reader conduct their own research and due diligence and determine if any of these names are appropriate relative to their own goals and objectives. In part 2, I will be sharing research candidates in the growth category.
Disclosure: Long ABBV,ABC,AMGN,GILD,MCK
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
