Healthcare: 8 Safe Bets For Dividends And Great Returns

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Includes: ABT, AZN, BMY, JNJ, LLY, MRK, NVS, PFE
by: Pragmatic Bear

The fears of a globalized sustained slowdown are growing by leaps and bound daily. The recent Fed statement had a harsh negative tone expressing concern over this same slowdown. I think it is time investors should look for high-quality income stocks in recession-resistant industries.

One of my favorite areas to focus on is the healthcare sector. The fact is the United States' population is aging. This means that in the next 10 to 20 years we will see a dramatic rise in the need for the healthcare. And of course your health is not concerned with how economies or markets are doing.

Some key factors I am considering:

Debt to Equity: The debt-to-equity ratio is a leverage ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. It reveals how a company has financed its assets. A low debt-to-equity ratio indicates lower risk because shareholders have claims on a larger portion of the company's assets. I normally look for a number below 60%.

Dividend Yield: The dividend yield is the sum of a company's annual dividends per share divided by the current price per share. I am looking for companies that are yielding above 3.50%.

FCF Payout Ratio: This ratio is the company’s current dividend per share (ttm) divided by its free cash flow per share. It gives the investor a clearer picture of the company’s ability to cover its dividend than the more traditional payout ratio. This is because free cash flow is much a harder metric for a company to manipulate, as opposed to net income. I look for a ratio in the neighborhood of 70% or lower.

Price to Owner's Earnings: This ratio looks at the relationship between the share price of the company and the free cash flow per share. I normally look for a multiple somewhere below 17.

Consecutive Years Increasing Dividends: One of the best ways to see how strong a dividend that a company has is to look at how consistently they issue and increase their payouts.

5 Year Average Annual Growth Rate: This is the average speed at which the dividend has grown during the previous 5 years. It helps us get an idea about how important the dividend is in the eyes of the company’s management.

Abbot Laboratories (NYSE:ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide.

Debt to Equity: 68.83
Dividend Yield: 3.60%
FCF Payout Ratio: 39%
Price to Owner's Earnings: 10.74
Consecutive Years Increasing Dividends: 39 years
5-Year Average Annual Growth Rate: 9.7%

Merck (NYSE:MRK) provides various health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products.

Debt to Equity: 31.60
Dividend Yield: 4.70%
FCF Payout Ratio: 45%
Price to Owner's Earnings: 9.58
Consecutive Years Increasing Dividends: 0
5-Year Average Annual Growth Rate: 0%

Johnson and Johnson (NYSE:JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide.

Debt to Equity: 30.14
Dividend Yield: 3.60%
FCF Payout Ratio: 62%
Price to Owner's Earnings: 17.48
Consecutive Years Increasing Dividends: 49 years
5-Year Average Annual Growth Rate: 10.6%

Eli Lilly (NYSE:LLY) develops, manufactures, and sells pharmaceutical products worldwide.

Debt to Equity: 47.13
Dividend Yield: 5.20%
FCF Payout Ratio: 63%
Price to Owner's Earnings: 12.25
Consecutive Years Increasing Dividends: 0 years
5-Year Average Annual Growth Rate: 4.14%

Bristol Meyers Squib (NYSE:BMY), a global biopharmaceutical company, discovers, develops, and delivers innovative medicines that help patients prevail over serious diseases.

Debt to Equity: 34.22
Dividend Yield: 4.20%
FCF Payout Ratio: 50%
Price to Owner's Earnings: 11.96
Consecutive Years Increasing Dividends: 0 years
5-Year Average Annual Growth Rate: 3.02%

Novartis AG (NYSE:NVS), through its subsidiaries, engages in the research, development, manufacture, and marketing of healthcare products worldwide.

Debt to Equity: 41.00
Dividend Yield: 4.15%*
*Switzerland based companies withhold 15% of any distributions made to US investors at source. US investors can deduct the 15% withholding on the US tax returns, however. As a result, holding shares of Novartis in a tax-deferred account is not advisable, since no tax credit can be claimed on such accounts.
FCF Payout Ratio: 39%
Price to Owner's Earnings: 10.74
Consecutive Years Increasing Dividends: 6 years
5-Year Average Annual Growth Rate: 21.32%

Pfizer (NYSE:PFE), a biopharmaceutical company, offers prescription medicines for humans and animals worldwide.

Debt to Equity: 46.89
Dividend Yield: 4.40%
FCF Payout Ratio: 34%
Price to Owner's Earnings: 7.83
Consecutive Years Increasing Dividends: 2 Years
5-Year Average Annual Growth Rate: -3.58% (assuming November 2011 dividend of $0.20)

AstraZeneca (NYSE:AZN) discovers, develops, and commercializes prescription medicines for cardiovascular, gastrointestinal, infection, neuroscience, oncology, and respiratory and inflammation diseases worldwide.

Debt to Equity
: 40.24
Dividend Yield: 3.80%
FCF Payout Ratio: 33%
Price to Owner's Earnings: 8.60
Consecutive Years Increasing Dividends: a very interesting dividend chart.
5-Year Average Annual Growth Rate: 13.88%

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