We ran a screen to filter healthcare stocks Warren Buffett would like: good returns on equity above 10%, a dividend yield of over 2%, sustainable business advantages producing significant free cash flows and a price/free cash flow ratio of under 20.
We also screened for market caps larger than $30 billion in order to "move the needle," meaning, the oracle from Omaha could acquire enough shares to make the investment worthwhile given Berkshire's (BRK.A) enormous size.
Moving forward, we think its possible that Buffett or his successor(s) will add some healthcare related positions to the portfolio given the cheap valuations of the sector. (But we don’t think Berkshire will pay a dividend.) According to the most recent 13F filing, Berkshire’s portfolio was only weighted 5.4% towards the healthcare sector. Considering his long-term positions in Glaxokline Smith (GSK), Sanofi-Aventis (SNY) and Johnson & Johnson (JNJ), these high-yielding names below seems plausible. Here they are …
Johnson & Johnson (JNJ): Yes we know, Buffett already owns over 42,000,000 shares of this healthcare company. But will he grow his stake? We think this "dog of the Dow" remains undervalued given its dominant position in the healthcare industry. While the company will experience some harder times ahead due to patent losses over the next decade, we believe the company’s consumer and medical devices divisions will pick up the slack due to the demographic trends unfolding as baby boomers begin to sunset into old age. Johnson & Johnson trades at $60.62 at the time of writing and yields 3.60%, giving investors solid income and good possibility of long term capital appreciation.
AstraZeneca (AZN): This British based company sells a suite of pharmaceutical products to treat a number of gastrointestinal, cardiovascular, and respiratory ailments, cancer and other infectious diseases. Though the company’s drug pipelines is one of worst among the large cap pharmaceutical player, the company has been paying dividends since 1993 and has a hefty 7.58% for yield seekers looking for reliable income. Shares trade at $48.48 at the time of writing.
Medtronic (MDT): Another dominating business, his company produces medical equipment and holds market leading positions in heart devices, insulin pumps, and spinal products. Known once for its leaning too much on its heart disease business, the company has moved into other therapeutic area, a good move in our opinion. Shares have appreciated over the past three months since we first wrote about the company here and again where we declared it one of our 10 dividend "kings" here. Medtronics trades on a TTM price to earnings ratio of 13.68. Shares trade hands at $39.60, and yield 2.3% at the time of writing.
Novartis (NVS): The Swiss-based pharmaceutical maker has a healthy balance sheet and a free cash flow yield of ~ 8%. As well, NVS has a dividend yield of 2.9% and over the past five years, that dividend has shot up from 1.6% to where it stands today. The company's healthy intellectual property portfolio has created a wide moat for itself, which will likely remain as long as Novartis can continue to fuel its late stage pipeline and keep making targeted acquisitions. But like AstraZeneca, Novartis faces tougher competition and difficult times ahead. Couples with this, is the fact that everyone seems to hate pharma these days. The market is essentially pricing in minimal growth to many of the bigger names in this industry, so if any of these large caps can surprise on the upside, the sector could give investors okay capital appreciation on top of solid dividend yields. Shares trade at $55.86.
One other name in the sector that we like, but didn’t meet our initial Buffett screen is Abbott Laboratories (ABT). The company's portfolio of patent protected drugs, along with its excellent nutritional and diagnostic groups and its history of strategic acquisitions, have dug ABT a wide economic moat, as we discussed here. The stock yields 3.85% and has a history of raising its dividend. Shares trade at $46.75