7 High Yield, Growing, U.S. Healthcare Companies Trading at Reasonable Valuations

by: Lenny Grover

Last time, we looked at high yield, attractively valued, technology companies. While those are more of a rarity than value-priced healthcare companies these days, let's turn our attention today to the healthcare sector to look for some attractive income plays. While there is a lot of uncertainty in the healthcare sector these days, we can look for companies where that risk already appears to be priced into a low valuation multiple. Using the Screener.co stock screener, we can filter for companies that meet the following criteria:

Exchange Traded On
"Over The Counter"
Dividend Yield-indicated annual dividend divided by closing price
Revenue Change-year over year
Country Located In
"United States"
Total Revenue(NYSE:A)

We are specifying a minimum yield of 1%, a maximum EV/EBITDA ratio of 8, a minimum annual revenue of $100M, and positive YoY revenue growth. As of 4/14/2011, this screen returns 7 companies. We can then rank these companies by descending dividend yield to produce the following list:

Company Name
PDL BioPharma Inc.
Eli Lilly + Co.
Bristol Myers Squibb Co.
Advocat Inc.
Lincare Holdings Inc.
National HealthCare Corporation
U.S. Physical Therapy, Inc.

PDL BioPharma (NASDAQ:PDLI) is an IP licensing company focused on the pharmaceutical and biotech markets. In the biotech space, these IP licensing entities are more common than the software market, and have faced fewer calls for regulatory reform. However, my personal investing approach is to stick with operating businesses. Several months ago, VirnetX (NYSEMKT:VHC) came up on one of my value screens. Even though the company is up 3+x since then, I am not that sorry I passed. For those of you who are more comfortable with IP licensing companies, PDLI's 9.8% yield and 6.1x EV/EBITDA ratio might be attractive.

Eli Lilly (NYSE:LLY) is a pharmaceutical company that is trading at a mere 5.3x EV/EBITDA ratio and yielding 5.5%. The company faces the expiration of the patents that prevent competitors from offering generic versions of its blockbuster drugs. There was a good article on 3/14 from another Seeking Alpha contributor describing the impact this is likely to have on the company. Given the impact that patent expirations are likely to have on the company's performance, I would pass on this one.

Bristol Myers Squibb (NYSE:BMY) is another large pharmaceutical company. They are trading at a 6.8x EV/EBITDA ratio and yielding 4.8%, representing a clear premium over LLY. Like LLY, however, BMY faces fewer imminent patent expirations as well, as described by this Seeking Alpha article. As a result, the financial performance of both of these companies is likely to be less predictable as they depend on newer drug approvals for stability or growth. As a result, income investors should be wary.

Advocat (AVCA) is a long-term care provider. They are yielding 3.1% and trading at a low 4.6x EV/EBITDA ratio. With only a ~$40M market cap, this is definitely a small-cap stock! They easily meet our $100+M annual revenue requirement with $290M of revenue in the most recent fiscal year, however, the margins of the business are razor thin. Also, beware of reimbursement risk as negotiated reimbursement rates for healthcare providers may be threatened. If you are looking for stability, AVCA is probably not for you but its low valuation multiples and high yield make it attractive to those with a higher risk tolerance.

Lincare Holdings (NASDAQ:LNCR) provides oxygen and respiratory therapy services. With a 2.6% yield and 7.1x EV/EBITDA ratio, its valuation metrics and dividend are attractive. Like many healthcare firms, reimbursement risk is likely causing the company to trade at a discount. For most healthcare companies, you really do need a macro perspective regarding reimbursement risk and the impact of healthcare reform on the type of business you are considering investing in, and LNCR is no exception.

National HealthCare (NYSEMKT:NHC) is another long-term care provider. Unlike Advocat, it is trading at a significantly higher 8.0x EV/EBITDA ratio and yielding only 2.4%. It also has $170M of preferred stock in its capital structure but its margins are much better than AVCA and it has a healthier balance sheet. As a result, you can expect less volatility.

U.S. Physical Therapy (NASDAQ:USPH) operates outpatient physical and occupational therapy clinics. It is trading at a 7.0x EV/EBITDA ratio and yielding 1.4%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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