Defensive Industry Dividends (Part 1): Healthcare

Includes: ABT, JNJ, LLY, NVS
by: Pragmatic Bear


Today I would like to look several healthcare companies with extremely recession proof dividends. I am of the opinion that there is somewhere between a 25-40% chance that the United States has already or will slip back into another recession. I base this feeling on the recent extreme volatility of market as well as the slew of negative economic indicators (both here and abroad).

With the Jackson Hole conference and Bernanke’s highly anticipated speech set to take place on Friday. I’m not really sure if there is anything more that the Fed can do; short of unavailing QE3. I do not think that the Fed will make that announcement on Friday as there has been much criticism over the effectiveness of QE2. The consensus seems to be that they will leave the decision open ended. The Fed has pledged to keep interest rates pegged at low levels until at least March of 2013. I see this as the rope around our waist as we slide down the slope of economic downturn. It is my belief that this will hold us out of recession and keep us in a period of long-term low growth rates.

This is why I am choosing to look at only the health care industry today. It has been proven for some time that people will continue to get sick whether the economy is booming or tanking. The major fundamentals that I am looking for in these companies are a solid dividend yield (>3%), a consistent history of paying and raising dividends, and payout ratio under 60%.

Abbot Laboratories (NYSE:ABT): is a major pharmaceutical company focused in the discovery, development, manufacture, and sale of a broad and diversified line of health care products. It is a large company with a market capitalization of $78 billion. They are trading at low forward multiple of 9.91%. ABT has an impressive yield of 3.8 % and a payout ratio of 58%. This seems like a logical pharmaceutical play for a value based investor. It also has a current ratio of 1.52 implying that it would be able to quickly cover its outstanding debts. ABT is a dividend aristocrat having paid out for 39 consecutive years. Since 1986 Abbott Laboratories has managed to double its dividend every 6 years on average.

Novartis (NYSE:NVS): Novartis is a leader in healthcare solutions. The company’s portfolio includes medicines, preventive vaccines and diagnostic tools, generic pharmaceuticals and consumer health products. NVS is a solid value stock with a dividend yield of 3.60% and a proven track record of growth (14% over the last 5 years). It also has a very attractive payout ratio of 47% which indicates room for continued growth. Novartis has also been very consistent in raising itsdividend. Since the merger in 1996 Novartis has increased its dividend every year. This includes the major recessions of the early 2000’s and 2008/2009. It is trading at 13 x earnings with an EPS of 4.24. Its debt to equity ratio is very low at only 41%. In my opinion, NVS seems to be a suitable addition to any value based portfolio. In the last month, NVS stock has been cut back by 10%. This represents an opportunity to acquire some shares of this great company an inexpensive price.

Johnson & Johnson (NYSE:JNJ): is an international American pharmaceutical, medical devices and consumer packaged goods manufacturer. It has a 15.54 trailing P/E ratio with a forward P/E ratio of 12.28. J&J is currently yielding 3.60% with a payout ratio of 52%. It has a very strong cash position with 29.68 billion on hand. This leads to J&J having a solid current ratio with 2.51 which means that it should be able to cover any short term debt obligations. It's a picture of consistency when it comes to its dividend history.

J&J has been issuing dividends since 1944 without fail. Also, it has been able to perpetually raise payouts for 47 straight years. Johnson and Johnson should keep your portfolio safe from any capital depreciation brought on by recessionary market movement. For example, at the March 2009 lows, JNJ had only dropped down to $47 dollars. Today it is trading at about $64 so you can see there is a large amount of safety built into this stock. By the same token, you do not want to own this stock for capital appreciation purposes; the true value of this stock lies in its reliable dividend. I feel that all of this financial data provides a strong endorsement to include Johnson and Johnson into anyone’s healthcare portfolio.

Eli Lilly & Co. (NYSE:LLY): is a global pharmaceutical company. However, with a market cap of 40 billion, it is the smallest company on my list. Today it is the world's largest manufacturer and distributor of psychiatric medications. Its dividend yield is the largest of these 4 companies coming in at 5.50%. However, some may consider it inexpensive when compared to some of the other companies as it is trading around 9.71 x forward earnings. The dividend payout ratio is also within the range, coming in at 46%. It has the longest running dividend on the list stretching all the way back to 1885. Included in this astoundingly long time frame is 42 consecutive years of dividend increases. Unfortunately, it has not raised this dividend since 2009.

The other aspect that scares me to some extent is that the U.S. patent protection on their number one drug Zyprexa is set to expire later this year. This product has made up a considerable portion of its revenue over the past several years and it will be interesting to see it goes about replacing it. Even with all of this, it remains that this is a solid consistent stock with a fantastic dividend yield. Anyone looking for some defensive exposure to the health care industry should take a look at LLY.

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