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Let's continue where we left off in the last article and consider another low beta group - health care. Over the last decade health care and pharma have seen success mostly in the rear view mirror. Blockbusters like Lipitor or Viagra are finding themselves at or near the end of their patent cycles and replacements, despite outsized research budgets, are few. The narrative is grim. Or is it?

Recall that when we looked at consumer staples we found stellar total returns with low volatility. Up to the end of the most recent quarter, September 28, Colgate-Palmolive (CL) delivered a total return of 16% with a beta of 0.34. Kimberly-Clark (KMB) offered up 12.3% in total returns and a beta of 0.09. The health care space shows similar circumstances at work. While not quite as pronounced as staples, the total return / low beta dynamic nevertheless warrants attention.

Let's take a look at four health care stocks in the context of beta and total returns. From the table below we find the following 25 year total returns and corresponding betas: Abbott Labs (ABT) 12.1% with a 0.44 beta; Johnson & Johnson (JNJ) 12.5% with a 0.49 beta; Merck (MRK) 9.0% with a 0.40 beta; and Pfizer (PFE) 12.9% with a 0.66 beta. Given that the S&P 500 has delivered about 9 % over the last 25 years, our four health care stocks start to look pretty good - especially with their reduced volatility!

The public is apparently starting to catch on. Twelve month total returns for the period ending September 28 are as follows: Abbott at 41%, J&J with 15%, and Merck and Pfizer each delivering 49%. During the same period the S&P 500 SPDR (SPY) delivered just over 33% with dividends re-invested.

While some may see the recent 12 month performance as overdone, I believe that we're in the initial stages of another secular bull market in health care stocks. The last 10 years have seen paltry, single digit returns in health care owing largely to the absence of new blockbuster drugs. True enough, but this doesn't take into account the evolving, even ongoing story in this sector: aging populations, advancing technology, and rising 'long-run' total returns.

Longrundata Model Portfolio, Total Returns as of September 28, 2012
CompanyTickerRecentDividend($)Yield(%)3 Months(%)12 Months(%)3 Year(%)5 Year(%)10 Year(%)25 Year(%)Beta
Colgate PalmoliveCL1082.482.33.924.515.611.39.316.00.34
Kimberly ClarkKMB862.963.
Coca ColaKO381.022.7-
Proctor & GamblePG692.253.214.314.
Philip MorrisPM923.403.71.951.128.3N/AN/AN/A0.87
Abbot LabsABT692.043.06.941.416.07.88.712.10.44
Johnson & JohnsonJNJ692.443.
General ElectricGE220.683.011.760.016.0-
Illinois Tool WorksITW591.522.614.952.
United TechnologiesUTX782.
Exxon MobilXOM912.282.57.831.713.61.712.911.70.83
Bank of AmericaBAC90.040.49.860.5-18.0-27.9-
JP MorganJPM401.202.912.545.70.9-0.710.78.81.64
US BancorpUSB340.782.36.354.919.53.19.4N/A0.83
Wells FargoWFC350.882.53.652.
Portfolio Averages
S & P 500 SPDRSPY145N/A1.916.033.713.*N/A
Staples SPDRXLP36N/A2.593.
Health Care SPDRXLV40N/A1.935.733.314.54.15.9N/AN/A
Industrial SPDRXLI36N/A2.033.931.514.7-0.67.8N/AN/A
Financial SPDRXLF15N/A1.646.240.84.3-13.1-1.1N/AN/A
Notes:The author is a direct owner of each company mentioned here.
The author is not an owner of SPDR's mentioned here.
Three month returns are 90 days, not annualized.
Yield' and 'Recent' data may not reflect end of quarter date.
*S & P 500 Index (not SPDR) from January 1987 to December 2011 with dividends re-invested.

Source: Considerations For A Low Beta Portfolio: Health Care