3 Healthcare Picks With Sustainable Dividends

Includes: ABT, JNJ, TEVA
by: Brad Prigmore

I believe every investor should have some type of exposure to either the bio-technology, pharmaceutical or any other healthcare-related sector for the remainder of 2012. In this article, I will take a look at three candidates I would not mind owning if the valuation presents itself in the coming weeks. They are Johnson & Johnson (JNJ), Abbott Laboratories (ABT) and Teva Pharmaceuticals (TEVA).

Johnson & Johnson

In my last healthcare-related article, I briefly mentioned I was long Johnson & Johnson. Here's why.

Lets start with stability. Johnson & Johnson is one of only eight companies in the world with an AAA credit rating. A fact not often recognized is how many companies have been taken off this list. Several off the top of my head include General Electric (GE), Pfizer (PFE) and Berkshire Hathaway (BRK.A). The only other two non-financials I can think of are aristocrats Exxon-Mobil (XOM) and Automatic Data Processing (ADP).

What about diversification? Johnson & Johnson is probably the most diversified blue chip healthcare company in the world. Over the past decade, JNJ shares have beat the S&P500 and the S&P Pharma Index. Johnson & Johnson currently trades at a price-to-earnings multiple of just over 18.

Johnson & Johnson is also a proven dividend growth champion. It pays a substantial 3.59% dividend yield. The real value in this blue chip is the impressive fact of steadily increasing dividends for nearly 50 consecutive years.

It has an acceptable payout ratio of about 65%. Between its relatively low payout ratio and its stable growth, Johnson & Johnson has the ability to maintain or increase its dividend payments. In 2011, Johnson & Johnson increased its quarterly dividends from $0.54 per share to $0.57 per share. This represented around a 5.5% increase.

Abbott Laboratories

I believe Abbott or Teva may offer the most compelling valuation in the group. Abbott had some important news recently. In a move believed to result in two stronger entities, Abbott recently announced a planned split-up of the company. This will be accomplished through the spin-off to shareholders of the research-based pharmaceuticals business, with estimated sales of $18 billion as a separate concern.

Abbott will retain its legacy medical products operations comprising of diagnostics, devices, nutritional division and generic drug operations. This accounted for nearly $22 billion in sales. Both companies will potentially benefit and provide separate growth opportunities. Abbott currently has a market cap of $93.7 billion. It has current EPS of around 3. This is projected to grow by almost 8% in 2012.

Abbott also received some good news recently when the label of its blockbuster drug, Humira (adalimumab) was expanded in Europe into the ulcerative colitis [UC] indication. The European Commission cleared Humira for treating adults suffering from moderately to severely active UC. The product gained approval for use in patients who did not respond satisfactorily to standard drugs for UC treatment. UC refers to a chronic inflammatory bowel disorder. Abbott currently offers an attractive dividend yield of 3.42% annually.

Teva Pharmaceuticals

I believe Teva is a buy at its current price. I am expecting a bounce from this company soon. Recent price history shows declines for the last week, the last month and the last quarter. I like this company mainly because of growth potential. Teva has grown EPS by nearly 37% over the last 5 years. Quarterly sales are up nearly 30%. The price-to-earnings ratio of Teva is just above 14, making it the lowest of the three. It is also projected to drop significantly lower over the coming year.

The dividend is an added bonus. Teva pays an annual dividend of around 2.12% which is currently the lowest yield of the three. It does, however, have a very stable and reliable payout ratio of only 31%. This is also the lowest of the three.

This is significant for several reasons. It shows there is cash available to raise the dividend or implement a stock buyback program. It also indicates company management that is fiscally prudent and protective of the rights of individual shareholders.

Teva is the world's largest generic drug manufacturer, and is likely to gain as the global population gets older and spends more money on health care. Its current sagging price should be viewed as a opportunity to accumulate shares at a discount.

Disclosure: I am long (NYSE:JNJ), (ABT), (TEVA).