3 Healthcare Stocks For Building An Income-Based Portfolio

Includes: COO, SYK, ZBH
by: StockRiters

When building an income-based portfolio, the major focus of investors needs to be on protection of capital and generating a steady income, more so if the goal is planning for retirement. Whereas the income generated during your working years can be reinvested for growing your portfolio, these stocks come in handy when the investor is no longer generating an annual employment income.

Our focus for today is the healthcare sector, which holds a great potential for growth. The healthcare sector has a combined market capitalization of $2.295 trillion. The long term annual return of the sector has been 11.3%, second only to consumer staples. Historically, the sector has been providing impressive returns with the lowest number of losing years.

Healthcare Sector Losing Years Since 1986











Source: Standard & Poor's Data

I have tried to find healthcare stocks with a good record of dividend payouts. My focus has been a more than 5% growth in earnings per share, 15% and above operating margin and a debt to equity ratio of under 0.5. In short, my focus has been on stocks that have plenty of scope for growing as well a history of regular dividend payouts.

Zimmer Holdings, Inc (ZMH)

Zimmer Holdings is in the business of manufacture and marketing of orthopedic reconstructive, spinal and trauma devices, dental implants, biologics and related surgical products. It has a market capitalization of $10.09 billion and has a net income of $760 million. Its annual revenue is $4.45 billion and its EBITDA earnings amounted to $1.39 billion. Total debt amounts to 20.19 percent of its assets and 31.222 percent of paid-up equity. Dividend/yield is $0.18/1.16% for the latest quarter for which data is available as reported on Google Finance, and earnings per share were at $4.28, reported at the same source. Beta ratio is 1.01 and price to earnings at 14.65.

Zimmer Holdings reported an EPS of $1.22 for the second quarter, which is more than the EPS of $1.06 reported in the same quarter in the previous year. However, after considering certain one-time expenses, the EPS comes to $1.34. Revenues were down by 1.1%, mostly due to unfavorable currency movement. The third quarter results are awaited as the company plans to unveil it on October 25, 2012. A sneak preview is available here.

ZMH is a leader in a growing industry and holds a dominant market share in its product mix. It also has an impressive international presence, generating 45% of its revenues from overseas operations.

The company was in the news early this month on the issue of a warning by FDA on certain hip implants regarding implementation of a testing mechanism. While the company has notified its customers of the issue, it has not withdrawn any product from the market. The negative news has resulted in fall in its share price from $68.78 on October 1, 2012 to $63.47.

Given an impressive dividend yield and its historic growth percentages, ZMH presents as a strong buy. While you can expect a steady income from the stock, buying it at this level also presents a healthy growth potential.

Stryker Corporation (NYSE:SYK)

Stryker Corporation, like Zimmer Holding, is one of the leaders in the surgical implants and surgical equipment industry. It has been growing at a steady pace since 1976, the year in which it went public. The market capitalization of SYK is 20.03 billion and an EPS of $3.73. Its price to earnings ratio is 14.12 and the dividend yield was $0.21/1.61% for the latest quarter, according to Google Finance data. Its EBITDA earnings amounted to $2.16 million which translate into a EBITDA margin of 26.09%. Total debt as a percent of its assets is 14.25% and in relation to its paid-up capital is 23.01%. Stryker Corporation paid a dividend of $0.75 last year.

Operational efficiency is the strongest point of Stryker Corporation. It has been complying with the government's mandate for cost reduction in healthcare by cutting costs and without attracting the ire of the FDA. The other strong point of the company is its endeavor in introducing new products. Stryker applied and received patents for 108 products in 2010. In the same year, it acquired Boston Scientific Corporation's (NYSE:BSX) neurovascular business. Its efforts in promoting a strong corporate culture have earned it 68th rank in Fortune Magazine's list of 100 best companies.

For the next five years, Stryker is expected to maintain a growth rate of 10.84%. As such it presents a good opportunity for capital appreciation along with receiving regular dividend for building an income-based portfolio.

The Cooper Companies (NYSE:COO)

The Cooper Companies has two manufacturing units that develop, manufacture and market a range of contact lenses for vision correction and for presbyopia, astigmatism and ocular dryness. A few years back the company had lost its market share to competitors but has since done a good job to recover its lost ground. Presently, COO is number three in its segment with a market share of around 16/17 percent.

The current market cap of the company is $4.56 billion and dividend/yield is $0.03/0.06% for the last half year according to latest available data at Google Finance. The EPS is $4.76 and the PE ratio is at 20.01. The stock is currently trading near its 52-week high of $100.92, which it achieved only last month in September 2012. Valuations do not appear attractive at the moment. However, investors need to look at the hidden potential for exponential growth and increase in margins.

Although the business of The Cooper Companies is small as compared to its competitors, Johnson & Johnson (NYSE:JNJ) C.R. Bard (NYSE:BCR) and Boston Scientific Corporation (BSX), the company generates good cash flows as it is focused and profitable. Additionally, the fundamentals of COO are improving faster than is generally believed. In the third quarter, the company delivered nearly double the growth of its largest market. Its strong cash flows are indications enough that it can fasten the process of debt repayment and/or help in further acquisitions.

There is good growth potential in the contact lens market. The Cooper Companies is a good buy on dips if you are a new investor because valuation still remains a primary issue.

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