Considerations For A Low Beta Portfolio: Health Care

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Includes: ABT, CL, JNJ, KMB, MRK, PFE, SPY
by: Harvey Malovich

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 (NYSE:CL) delivered a total return of 16% with a beta of 0.34. Kimberly-Clark (NYSE: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 (NYSE:ABT) 12.1% with a 0.44 beta; Johnson & Johnson (NYSE:JNJ) 12.5% with a 0.49 beta; Merck (NYSE:MRK) 9.0% with a 0.40 beta; and Pfizer (NYSE: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 (NYSEARCA: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
Company Ticker Recent Dividend($) Yield(%) 3 Months(%) 12 Months(%) 3 Year(%) 5 Year(%) 10 Year(%) 25 Year(%) Beta
Colgate Palmolive CL 108 2.48 2.3 3.9 24.5 15.6 11.3 9.3 16.0 0.34
Kimberly Clark KMB 86 2.96 3.4 3.1 26.1 18.5 8.3 7.8 12.3 0.09
Coca Cola KO 38 1.02 2.7 -3.2 19.2 15.9 8.7 7.0 12.7 0.41
Proctor & Gamble PG 69 2.25 3.2 14.3 14.0 10.4 2.5 6.8 12.6 0.27
Philip Morris PM 92 3.40 3.7 1.9 51.1 28.3 N/A N/A N/A 0.87
Abbot Labs ABT 69 2.04 3.0 6.9 41.4 16.0 7.8 8.7 12.1 0.44
Johnson & Johnson JNJ 69 2.44 3.5 2.2 15.1 8.6 4.2 4.8 12.5 0.49
Merck MRK 45 1.68 3.7 8.7 49.1 18.1 1.4 4.4 9.0 0.40
Novartis NVS 61 2.48 4.0 9.1 17.0 11.8 6.1 7.1 N/A 0.48
Pfizer PFE 25 0.88 3.5 9.0 49.1 19.8 4.9 1.8 12.9 0.66
General Electric GE 22 0.68 3.0 11.7 60.0 16.0 -8.2 1.9 9.0 1.43
Illinois Tool Works ITW 59 1.52 2.6 14.9 52.1 15.8 3.1 9.2 N/A 1.27
3M MMM 93 2.36 2.5 4.1 33.8 11.2 2.2 7.3 9.2 1.02
United Technologies UTX 78 2.14 2.7 5.0 15.7 11.9 1.4 12.4 12.5 1.15
Exxon Mobil XOM 91 2.28 2.5 7.8 31.7 13.6 1.7 12.9 11.7 0.83
Bank of America BAC 9 0.04 0.4 9.8 60.5 -18.0 -27.9 -9.5 4.9 1.86
Citigroup C 33 0.04 0.1 19.1 41.7 -10.2 -40.6 -18.4 1.6 1.91
JP Morgan JPM 40 1.20 2.9 12.5 45.7 0.9 -0.7 10.7 8.8 1.64
US Bancorp USB 34 0.78 2.3 6.3 54.9 19.5 3.1 9.4 N/A 0.83
Wells Fargo WFC 35 0.88 2.5 3.6 52.2 10.6 1.1 6.3 15.4 1.13
Portfolio Averages
S & P 500 SPDR SPY 145 N/A 1.91 6.0 33.7 13.9 0.6 7.3 9.32* N/A
Staples SPDR XLP 36 N/A 2.59 3.1 26.0 15.4 7.7 8.0 N/A N/A
Health Care SPDR XLV 40 N/A 1.93 5.7 33.3 14.5 4.1 5.9 N/A N/A
Industrial SPDR XLI 36 N/A 2.03 3.9 31.5 14.7 -0.6 7.8 N/A N/A
Financial SPDR XLF 15 N/A 1.64 6.2 40.8 4.3 -13.1 -1.1 N/A N/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: www.longrundata.com
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Disclosure: I am long CL, KMB, ABT, JNJ, MRK, PFE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.