When investors think about health care stocks, growth is often the first word that pops into their minds. This happens with good reason, as health care issues are often quintessential growth stocks. By growth stock we mean the shares of a company with earnings that are increasing at a higher rate than peers. In general, growth investors focus on the denominator in the price-to-earnings (P/E) ratio, looking for companies or industries where high expected earnings growth will propel stock prices upward. Such issues typically do not offer robust dividend yields, as company managers usually prefer to reinvest profits in the business in order to take advantage of high returns on capital and support bottom-line growth, rather than distribute a portion of net income to shareholders in the form of dividends.
That said, there are healthcare companies that pay dividends, a number of which are quite generous. To find some of these issues, we screened the Drug, Medical Supply Invasive and Non-Invasive, Medical Services, Pharmacy Services, and Biotechnology industries. First, we looked for companies with dividend yields above 1% and, then, to help ensure the dividends were sustainable, we limited the results to those firms with long-term debt as a percentage of total capital below 50%. The list contained 40 names, we highlighted three with appealing investment merit: CVC Caremark Corp. (CVS), St. Jude Medical (STJ), and Bristol-Myers Squibb (BMY).
CVS Caremark Corp.
CVS is a leading integrated healthcare company combining one of the nation’s leading pharmaceutical services companies with its largest pharmacy chain. CVS pharmacists fill more than one billion prescriptions each year through more than 7,350 locations in 41 states, Puerto Rico, and the District of Columbia.
The company’s latest batch of results suggest that it’s poised to continue posting impressive growth in 2012. It reported a 9% earnings advance in the March quarter on 20% better revenues. The top line is likely to reap the benefits of rival Walgreen’s (WAG) fallout with Express Scripts (ESRX), which has forced customers to find new places to fill prescriptions. CVS’ wide footprint makes it a convenient alternative for would-be Walgreen’s shoppers. Same-store sales improved 10% in the most recent quarter. Margins, meanwhile, ought to stabilize, as integration issues seem to be a thing of the past. This should help the company reach the upper end of management’s updated earnings guidance of $3.23-$3.33 for the full year.
Share repurchases and bolt-on acquisitions have long been a priority, but management recently hinted that dividend growth was at the top of its agenda, with plans for the payout ratio to total 25%-30% by mid-decade. Income growth has always been fairly steady, but ought to pick up over the next few years, in our opinion.
St. Jude Medical, Inc.
St. Jude Medical, develops, manufactures, and distributes cardiovascular medical devices for the global cardiac rhythm management, cardiac surgery, cardiology, and atrial fibrillation therapy areas. It has four main operating segments: Cardiac Rhythm Management (59% of ’10 sales); Neuromodulation (7%); Cardiovascular (20%); and Atrial Fibrillation (14%).
First-quarter earnings growth topped expectations, as sales momentum at the company’s peripheral businesses picked up the slack for the still-struggling Cardiac Rhythm Management franchise. Cost controls, meanwhile, helped keep SG&A costs in check and boost margins. Although guidance suggests that bottom-line growth may soften as the year progresses, Value Line analyst Erik Antonson believes that the company’s deep pipeline and wide footprint will help both top- and bottom-line growth reaccelerate in 2013 and thereafter.
The company initiated a rather healthy quarterly dividend last June, which would amount to a near 2% annual yield if left unchanged at today’s price. That said, Mr. Antonson expects future cash flow to be enough to meet capital requirements, buy back shares, and maintain the current yield.
Bristol-Myers Squibb manufactures proprietary medical products, pharmaceuticals, diagnostics, infant formula, orthopedic implants, as well as health and beauty aids. Major brand names include: Plavix, Avapro, Pravachol, Coumadin, Reyataz, Sustiva, Baraclude, Erbitux, Taxol, Sprycel, Ixempra, Abilify, Enfamil, and Enfagrow.
BMY stock offers an appealing dividend yield of 4.0%. The company’s cash pile handily covers outstanding debt on the balance sheet and cash flow generation is likely to remain ample according to Value Line analyst Jeremy Butler. Indeed, Mr. Butler believes that new products will help offset the void left by the upcoming patent expiration of top-selling drug Plavix. He also looks for revenues to continue benefiting from acquisitions in niche markets.
Although a more aggressive approach in the M&A game usually pinches flexibility and comes at the expense of dividend growth, Bristol’s finances ought to allow management to remain active on both fronts. The stock may not stand out for growth potential at this time, but its income component adds appeal, while limiting downside risk.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.