Many times when I develop a screen, I set parameters that are based on a company's fundamentals. That said, this screen focuses on two major healthcare companies demonstrating at least 30.00% returns on equity (ROE) over the last 12 months. The term 'Return on Equity' is defined as "the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested." In my opinion, the screen of companies based on ROE acts a stepping stone for a beginning investor.
GlaxoSmithKline (GSK) - trades in a 52-week range of $38.76 (52-week low) and $47.48 (52-week high), closed trading at $45.72/share on Friday. There are two reasons I am attracted to GSK, especially at current levels. First, the company has demonstrated a 63.10% return on equity over the last 12 months, which to me is exceptional considering industry competitor Pfizer (PFE) only demonstrated a return on equity of 9.55%. Second, the company is expected to grow 6.70% for the September quarter, which is pretty good considering Pfizer is expected to demonstrate negative growth of -9.70%, and Merck (MRK) is only expected to grow 1.1%. One of the secondary variables to consider when it comes to GSK is the company's annual dividend yield, which is currently 4.60% ($2.11). From an income standpoint, the yield is roughly 24.30% higher then that of MRK and PFE, which makes GSK the most attractive dividend play of the three.
Bristol-Myers Squibb Co. (BMY) - trades in a 52-week range of $25.69 (52-week low) and $36.34 (52-week high), closed trading at $36.05/share on Friday. Based on the company's recent performance, up nearly 8.05% over the last three months, there are two reasons why I like BMY. First and foremost, the company has demonstrated a return on equity of 30.52% over the last 12 months—nearly four times that of PFE's—which was 9.55%. Second, the company has a very attractive annual dividend yield which is currently 3.80% ($1.36), slightly higher than both PFE and MRK. From an income standpoint, the company's dividend has been raised three times since September 2009 and I think it will be raised if the company can surpass analyst estimates for the September quarter.
Final Analysis
Not only do GSK and BMY meet the minimum requirements set forth in the screen, each possesses its own unique positive catalysts. From an income standpoint, both companies are clear winners, and pay much higher yields then industry leaders PFE and MRK. From a growth standpoint, I'd remain cautious since both are expected to demonstrate negative growth during the September quarter. It should be noted that BMY most recently came in-line with analysts' estimates for the June quarter and GSK missed estimates by 3.50% during the same period. Both earnings announcements should result in a short-term downturn in the performance of both stocks and I would consider a larger position if each company demonstrates a 7%-15% decline in share price.
