By Rob Carroll
Today we highlight five safe healthcare stocks that can strengthen any retirement portfolio, healthy and ailing alike. While it is no secret that these industry leaders produce, it never hurts to take a look at a few of the reasons why. Here they are:
Novartis AG ADR (NVS): This developer and manufacturer of healthcare products provides investors with a great deal of stability in the short- and long-term due to its operation across multiple segments and earnings growth potential in an industry that can at times be stagnant.
While the branded pharmaceuticals segment profits from a mix of new pipeline products and existing drugs--often launching new drugs to offset the slowing growth of older ones--Novartis’ generic business, Sandoz, accounts for patent expirations by extending the life of in-house losses and grabbing a percent of competitive branded products that have lost patent protection themselves.
Currently, the vaccine division is enjoying an increase in pricing power due to a decrease in competition, and the consumer products department continues to grow its presence in the eye-care industry following the acquisition of Alcon (ACL). Recently trading for around $55, Novartis yields a handsome 4.29% and uses its cash beneficially to shareholders, buying back shares with 100% of its cash flow (after acquisitions and dividends). Novartis also has a historically low price to book ratio.
St. Jude Medical Inc. (STJ): Not to be confused with the St. Jude Children’s Research Hospital, St. Jude Medical is a leading manufacturer of cardiovascular devices and a technological pioneer when it comes to emerging treatments.
Already the maker of the world’s most used mechanical heart valve, and number one in the vascular closure market, St. Jude looks to become a leader in the markets for atrial fibrillation and neuromodulation, both of which hold great potential. Their catheter-ablation devices to treat atrial fibrillation look to improve upon the low success rate of current treatments, and their neurostimulators, often used to treat chronic pain, now have the potential to treat depression, epilepsy, incontinence, and Parkinson’s disease. The company experienced a revenue growth of 10% in 2010 and is preparing to launch neurostimulators for Parkinson’s and migraines in Europe in 2011-12. Trading for around $52.50, STJ offers a dividend of 1.6%.
We believe this company is showing new leadership in today's market and could easily trade at our fair value estimate of $58 per share as healthcare spending recovers along with the broader economy. We use a 10% discount rate for our analysis.
Johnson & Johnson (JNJ): As a leader across several major healthcare industries, including medical devices, over-the-counter medicines, and prescription pharmaceuticals, Johnson & Johnson holds claim to a diverse revenue base and robust research pipeline.
Excellent cash flow allows JNJ the freedom to acquire and grow on a whim, and with their pharmaceutical division--which boasts several industry-leading drugs, like Remicade for rheumatoid arthritis--still only accounting for 35% of total revenue, the company is diverse enough to overcome any patent losses now and in the future. It also helps when 70% of your products hold the #1 or #2 spot in their respective markets.
JNJ currently yields 3.61% annually, but more importantly, the company has been increasing dividends for the past 45 years. As as we wrote about here, we think they'll up their dividend this quarter. Since the late 1960s, JNJ has increased 9,700%. When adjusted for dividends, that number grows to 21,400%. Shares currently trade for around $60.
Medtronic Inc. (MDT): Already one of the largest medical device companies, Medtronic offers shareholders stability and growth by continuing to invest in innovation and purchasing new technologies in potentially lucrative markets.
In the late 1990s, MDT invested in neuromodulation, diabetes, and spinal products, and now, like St. Jude Medical, Medtronic holds a strong position in the developing neuromodulation market and is poised to make further advancements in the field. Guru investor David Tepper is a shareholder. Considering that the aforementioned investments saw revenue increases of 25% in 2000 and then 40% in 2010, the future outlook is positive. Trading for around $39.25, MDT yields 2.29%.
Abbott Laboratories (ABT): This healthcare giant boasts a large lineup of patent-protected drugs, leads the diagnostics industry, and maintains a strong nutritional division. While the active research and development department continues to create the next generation of drugs, the diagnostic and nutritional segments generate enough sales (25% of total sales) to protect the company from patent losses.
While current blockbuster drugs such as autoimmune drug Humira, HIV/AIDS drug Kaletra, and cardiovascular drugs Tricor and Trilipix generate $8 billion in annual sales (Humira also grew 19% in 2010), Abbott grows its drug lineup through successful acquisitions and partnerships, as can be seen with the recent acquisitions of Knoll and Kos pharmaceuticals. With ample cash flow and a strong acquisitions record, expect the same kind of performance for years to come. ABT currently trades around $50 a share and yields 3.84% annually. We also think this is a healthcare stock that Buffett could buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.