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Summary

  • For each S&P 500 industry sector, I will be taking a look at available companies to help determine the best stocks for income investors.
  • In determining the best stocks per industry, I will be examining both the dividend growth and dividend yields of the stocks.
  • I believe that Baxter International and Johnson & Johnson are the two best long-term options for income investors in this group of Health Care Equipment & Services stocks.

Overview

In this series of articles, I will be identifying which stocks for various S&P industries are best suitable for income investors, based on dividend growth and yield. For Part 14, I will be taking a look at Health Care Equipment & Services stocks. These stocks include:

  • Abbott Laboratories (NYSE:ABT)
  • Agilent Technologies (NYSE:A)
  • C.R. Bard (NYSE:BCR)
  • Baxter International (NYSE:BAX)
  • Becton Dickinson (NYSE:BDX)
  • Boston Scientific (NYSE:BSX)
  • CareFusion (NYSE:CFN)
  • Covidien (NYSE:COV)
  • Edwards Lifesciences (NYSE:EW)
  • Hospira (NYSE:HSP)
  • Intuitive Surgical (NASDAQ:ISRG)
  • Johnson & Johnson (NYSE:JNJ)
  • Medtronic (NYSE:MDT)
  • PerkinElmer (NYSE:PKI)
  • St. Jude Medical (NYSE:STJ)
  • Stryker (NYSE:SYK)
  • Thermo Fisher Scientific (NYSE:TMO)
  • Varian Medical Systems (NYSE:VAR)
  • Zimmer Holdings (NYSE:ZMH)

The following stocks currently do not pay a dividend: Boston Scientific, CareFusion, Edwards Lifesciences, Hospira, Intuitive Surgical, and Varian Medical Systems.

When ranking the dividend paying stocks by yield, the order is as follows:

  • Baxter International - 2.79%
  • Johnson & Johnson - 2.77%
  • Abbott Laboratories - 2.21%
  • Becton Dickinson - 1.89%
  • Medtronic - 1.87%
  • Covidien - 1.80%
  • St Jude Medical 1.70%
  • Stryker - 1.52%
  • Agilent Technologies - 0.95%
  • Zimmer Holdings - 0.87%
  • PerkinElmer - 0.63%
  • CR Bard - 0.57%
  • Thermo Fisher Scientific - 0.52%

When ranking them by dividend growth over the past five years, the order is as follows:

  • Stryker - 205%
  • Covidien - 100%
  • Baxter International - 88.46%
  • Becton Dickinson - 65.15%
  • Johnson & Johnson - 42.86%
  • Medtronic - 36.59%
  • Agilent Technologies - 32%
  • St Jude Medical 28.57%
  • CR Bard - 23.53%
  • Zimmer Holdings - 22.22%
  • Thermo Fisher Scientific - 15.38%
  • Abbott Laboratories - 14.95%
  • PerkinElmer - 0%

Of the five stocks that pay a yield under 1%, none of them offer enough growth to consider as an income investment. Out of the stocks that have a yield between 1% and 2%, Covidien and Stryker have seen the highest dividend growth. Adding these to the three stocks paying a yield over 2% seems to provide the best possibilities for income investments.

Looking at revenue over the past five years, Stryker has seen the best growth, while Abbott Laboratories and Covidien have seen negative growth. (ABT's negative growth is mainly attributable to the spinoff of AbbVie.) Although, since the spinoff, you can see that revenue has been fairly flat, while the other companies have seen an increase in revenue over the past year.

BAX Revenue (<a href=

BAX Revenue (TTM) data by YCharts

In terms of earnings, Covidien has seen the best growth over the past five years, while both Abbott Laboratories and Stryker have seen a decrease over the same time period.

BAX EPS Basic Chart

BAX EPS Basic (TTM) data by YCharts

The payout ratios of each of the companies are stable, with Stryker having the highest at 53.76% and Covidien having the lowest at 32.98%.

BAX Payout Ratio Chart

BAX Payout Ratio (TTM) data by YCharts

Conclusion

I think all five of these companies are well run businesses that will be successful in the long run. However, currently I believe that Stryker, Covidien and Abbott Laboratories are somewhat overvalued at the moment. Striker has a trailing PE ratio of 39.79 and Abbott Laboratories has a trailing PE ratio of 25.94. Covidien's PE ratio of 20.46 doesn't seem too bad, but its forward PE ratio of 17.81 is the second highest out of the group (with Abbott's 17.91 being the highest).

Looking at the chart below you can see that the trailing values have significantly increased over the past year for these three stocks while the trailing PE of the other two stocks have been more consistent and/or falling.

BAX PE Ratio (<a href=

BAX PE Ratio (TTM) data by YCharts

This leaves Baxter International and Johnson & Johnson. These are the two highest yielding stocks out of this group of stocks. Neither of the stocks display mind blowing dividend growth, but it is substantial and consistent.

I feel that both companies will continue to reward long-term investors with both positive returns and dividend growth. In terms of Baxter International, the company will soon split into two separate companies (which should improve the company in the long run), and whether investors keep or sell the spinoff shares, I believe Baxter International remains a solid stock to own.

Johnson & Johnson is a perfect example of a 'slow and steady' growth stock. Operating in a variety of segments, Johnson & Johnson still has a number of ways to achieve continued growth. The company remains fairly valued and is one of the highest quality stocks out there in my opinion. As always, I suggest individual investors perform their own research before making any investment decisions.

Source: The Best Dividend Growers, Part 14: Baxter International And Johnson & Johnson