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Health Care / Pharma Stocks 10/28/16

If you started following me in 2016, you may not have been exposed to the chance to read Biblical Proverbs That Guide My Investing. I will repeat on of those verses for those who may not remember:

Ecclesiastes 11:2 - Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on earth.

"Divide your portion" is - in the texts I have read - interpreted as "diversify your investments". The instruction to portion by seven takes some simple interpretation. The number "6" has a spiritual meaning - it is the number that means incomplete or lacking. "7" is the number for completion. "8" would be beyond completion. So the warning should not be literally interpreted as "8 investments are enough". I see the correct interpretation as being "be diversified as you prudently can" - and always be working to expand your investment universe of sectors that you know well enough to prudently invest.

"Divide your portion" is advice coming from someone who is already working hard to correctly assess their investments. I believe that this is a warning that things could go wrong - even with some of the components in the best of plans.

I have recently posted the reminder that Health Care REITs are not one sector. The same is true for Health Care / Pharma. The data:

The Predictive Power of subsector on Valuations: There is a huge difference in the type of products or services that this universe produces. Could that difference account for differences in performance and valuation? Note: Some companies are so well diversified that the sub-sector assignment is partially arbitrary.

The following stocks were in the Distribution sub-sector: ABC, CAH and MCK. Their YTD mean price gain = -31.60% and 0 of the 3 beat the sector mean yearly price gain of -6.65%. Their mean yield = 1.84% and they had an average price/earnings ratio = 11.60. Their mean LTM dividend growth = 11.09% and they had an average CAGR projection of 11.00.

The following stocks were in the Medical devices sub-sector: BAX, BCR, BDX, MDT, STJ, SYK and ZBH. Their YTD mean price gain = 17.30% and 7 of the 7 beat the sector mean yearly price gain. Their mean yield = 1.28% and they had an average price/earnings ratio = 19.63. Their mean LTM dividend growth = 10.10% and they had an average CAGR projection of 8.17.

The following stocks were in the Pharmaceutical sub-sector: ABBV, AMGN, AZN, BAYRY, BMY, GSK, JNJ, LLY, MRK, NVO, NVS, PFE, RHHBY, SNY, TEVA and ZTS. Their YTD mean price gain = -11.28% and 6 of the 16 beat the sector mean yearly price gain. Their mean yield = 3.40% and they had an average price/earnings ratio = 14.97. Their mean LTM dividend growth = 5.24% and they had an average CAGR projection of 6.18.

The following stocks were in the Diagnostic sub-sector: A, DGX and TMO. Their YTD mean price gain = 6.74% and 3 of the 3 beat the sector mean yearly price gain. Their mean yield = 1.15% and they had an average price/earnings ratio = 18.76. Their mean LTM dividend growth = 6.75% and they had an average CAGR projection of 8.33.

The historical returns in this sector are good. You don't want to skip it. But this could be a sector where it is better to buy the ETF instead of buying individual stocks.

The stats:

Health Care / Pharma Stocks 10-28-16

Yield in the spreadsheet below is based on the Q3-16 dividend. Spreadsheet header abbreviations: Div = dividend; EPS = earnings per share; LTM = last twelve months; YTD = year to date. The dividend to EPS ratio is a measure of dividend safety. At this point in time, companies that pay dividends once per year have had their payouts divided by four and encoded in this data as if they paid a quarterly dividend. AZN pays two unidentical dividends per year. I take the sum of those dividends and divide by four to get a run rate dividend per quarter. The last four columns measure the percentage change in the 2016 EPS projection; the change in the price target since the beginning of the year; the change in the dividend since Q3-15; and the average yearly change in the dividend since Q3-13.


    Div Current Div/ Div/ Percent Change
Company and ticker Price /Quarter Yield EPS16 EPS17 Price Pr+Div EPS16 Target Div 1yr Div 3yr

Agilent Technologies (NYSE:A) 43.22 0.115 1.06 24.1% 21.0% 3.37 4.47 0.53 11.66 15.00 10.32
AbbVie Inc. (NYSE:ABBV) 57.60 0.570 3.96 47.3% 40.9% -2.77 0.12 -3.79 -3.94 11.76 12.73
AmerisourceBergen Corporation (NYSE:ABC) 69.14 0.340 1.97 24.5% 23.4% -33.33 -32.35 -4.80 -18.56 17.24 17.52
Abbott Laboratories (NYSE:ABT) 39.54 0.260 2.63 47.1% 43.0% -11.96 -10.22 -7.14 -7.44 8.33 24.86
Amgen Inc. (NASDAQ:AMGN) 145.18 1.000 2.76 34.7% 31.9% -10.56 -8.72 8.36 -2.35 26.58 28.63
AstraZeneca PLC (NYSE:AZN) 28.60 0.350 4.90 46.8% 52.2% -15.76 -12.67 43.75 -0.22 0.00 0.00
Baxter International Inc. (NYSE:BAX) 47.20 0.130 1.10 27.2% 24.2% 23.72 25.09 33.57 33.58 13.04 -13.37
Bayer AG (OTCPK:BAYRY) 99.22 0.705 2.84 34.0% 32.9% -20.52 -18.82 2.85 -28.26 10.50 19.62
CR Bard Inc. (NYSE:BCR) 214.71 0.260 0.48 10.1% 9.1% 13.34 13.75 3.54 20.57 8.33 7.40
Becton, Dickinson and Company (NYSE:BDX) 167.79 0.660 1.57 30.8% 27.9% 8.89 10.18 1.90 10.49 10.00 10.06
Bristol-Myers Squibb Company (NYSE:BMY) 51.00 0.380 2.98 54.5% 51.4% -25.86 -23.65 21.83 -13.46 2.70 2.78
Cardinal Health, Inc. (NYSE:CAH) 67.50 0.449 2.66 32.1% 28.8% -24.39 -22.37 5.47 -10.92 16.02 14.02
Quest Diagnostics (NYSE:DGX) 80.44 0.400 1.99 31.4% 29.4% 13.07 15.32 0.39 19.89 5.26 10.14
Gilead Sciences Inc. (NASDAQ:GILD) 73.88 0.470 2.54 16.0% 16.4% -26.99 -25.60 -2.16 -19.80 9.30 na
GlaxoSmithKline PLC (NYSE:GSK) 40.14 0.710 7.08 110.9% 104.4% -0.52 6.52 -0.39 2.27 14.70 9.13
Johnson & Johnson (NYSE:JNJ) 115.33 0.800 2.77 47.6% 44.8% 12.28 14.61 4.84 16.96 6.67 6.62
Eli Lilly and Company (NYSE:LLY) 74.53 0.510 2.74 57.3% 51.0% -11.55 -9.73 -3.00 -3.25 2.00 1.35
McKesson Corporation (NYSE:MCK) 124.11 0.280 0.90 9.3% 8.6% -37.07 -36.51 -16.34 -26.36 0.00 5.56
Medtronic Inc. (NYSE:MDT) 81.93 0.430 2.10 36.9% 33.1% 6.51 8.75 6.39 8.37 13.16 15.56
Merck & Co. Inc. (NYSE:MRK) 58.84 0.460 3.13 48.9% 47.4% 11.40 14.88 0.27 9.30 2.22 2.27
Novo Nordisk A/S (NYSE:NVO) 35.66 0.182 2.05 32.9% 31.3% -38.60 -37.66 -1.77 -41.60 -3.95 5.99
Novartis AG (NYSE:NVS) 71.07 0.667 3.76 56.4% 54.4% -17.40 -15.07 -10.59 -13.18 -5.21 1.95
Pfizer Inc. (NYSE:PFE) 31.93 0.300 3.76 48.8% 44.8% -1.08 1.70 4.24 -4.20 7.14 7.72
Perrigo Company PLC (NASDAQ:PRGO) 87.06 0.145 0.67 8.3% 7.5% -39.83 -39.53 -26.72 -45.89 16.00 17.24
Roche Holding AG (OTCQX:RHHBY) 28.82 0.250 3.47 53.5% 50.0% -16.39 -14.22 -4.10 -7.65 -7.75 -0.12
Sanofi (NYSE:SNY) 38.84 0.407 4.20 53.4% 54.9% -8.93 -6.07 -1.29 -8.52 1.37 -3.96
St. Jude Medical Inc. (NYSE:STJ) 77.97 0.310 1.59 30.9% 28.2% 26.23 28.23 -5.65 10.97 6.90 7.43
Stryker Corporation (NYSE:SYK) 114.27 0.380 1.33 26.3% 23.8% 22.95 24.59 3.21 18.88 10.14 12.78
Teva Pharmaceutical Industries (NYSE:TEVA) 42.32 0.340 3.21 26.2% 23.2% -35.53 -33.97 -11.13 -15.17 -0.00 1.98
Thermo Fisher Scientific, Inc (NYSE:TMO) 147.21 0.150 0.41 7.3% 6.5% 3.78 4.20 0.37 12.82 0.00 0.00
Zimmer Biomet Holdings, Inc. (NYSE:ZBH) 122.55 0.240 0.78 12.0% 10.9% 19.46 20.39 2.05 15.95 9.09 6.36
Zoetis Inc. (NYSE:ZTS) 48.56 0.095 0.78 19.9% 16.4% 1.34 1.93 -1.04 6.32 15.15 13.49

Average       2.44 35.9% 33.6% -6.65 -4.76 1.36 -2.27 7.55 8.26

With the 10 Treasury at 1.83% and the sector average yield on Q3 dividends at 2.44% - the spread is 61 basis points.
The cap weighted ETF XLV has changed -5.90% year to date - with dividends included, its total return is -4.79%.
The yield on the XLV is 1.63% using the sum of LTM dividends - while LTM dividend growth is 11.44%.
Earnings Growth & P/E Ratios 10-28

Fiscal and calendar years are not in sync. ABC, BDX, CAH, MCK, MDT and PRGO began fiscal 2015 at least one quarter earlier than calendar 2015. Several stocks sell at valuations based on their drug pipelines - and short-term growth in EPS fails to capture a growth picture which is expected to come in 2016 and beyond. BMY is a good example. 2017 EPS projection along with the 2016 projections for GSK and NVO are from NASDAQ. The rest of the projections are from Yahoo Finance. High and low numbers were last updated at the end of Q3-16.


  Earnings / Share Earn. Growth P/E Ratios 16 EPS Range
Co. 2011 2012 2013 2014 2015 2016 2017 13-14 14-15 15-16 2014 2015 2016 High Low Range

A 295 312 288 304 174 191 219 5.56% -42.76% 9.77% 14.22 24.84 22.63 193 189 2.09%
ABBV 0 0 314 332 429 482 557 5.73% 29.22% 12.35% 17.35 13.43 11.95 499 464 7.26%
ABC 251 276 314 397 496 555 582 26.43% 24.94% 11.90% 17.42 13.94 12.46 581 545 6.49%
ABT 0 174 201 228 215 221 242 13.43% -5.70% 2.79% 17.34 18.39 17.89 224 214 4.52%
AMGN 533 651 760 870 1038 1154 1255 14.47% 19.31% 11.18% 16.69 13.99 12.58 1221 1071 13.00%
AZN 367 321 253 214 213 299 268 -15.42% -0.47% 40.38% 13.36 13.43 9.57 195 97 32.78%
BAX 234 246 254 266 138 191 215 4.72% -48.12% 38.41% 17.74 34.20 24.71 170 159 5.76%
BAYRY 0 688 745 799 763 829 858 7.25% -4.51% 8.65% 12.42 13.00 11.97 826 814 1.45%
BCR 640 657 578 840 908 1025 1140 45.33% 8.10% 12.89% 25.56 23.65 20.95 1031 1009 2.15%
BDX 533 537 581 625 716 856 945 7.57% 14.56% 19.55% 26.85 23.43 19.60 870 853 1.99%
BMY 228 199 182 185 201 279 296 1.65% 8.65% 38.81% 27.57 25.37 18.28 271 220 18.28%
CAH 267 321 373 384 438 559 623 2.95% 14.06% 27.63% 17.58 15.41 12.08 530 519 1.97%
DGX 285 392 400 410 477 510 544 2.50% 16.34% 6.92% 19.62 16.86 15.77 515 505 1.96%
GILD 181 171 201 809 1261 1175 1144 302.49% 55.87% -6.82% 9.13 5.86 6.29 1285 1109 14.98%
GSK 325 353 373 296 232 256 272 -20.64% -21.62% 10.34% 13.56 17.30 15.68 261 126 52.73%
JNJ 500 510 552 597 620 672 714 8.15% 3.85% 8.39% 19.32 18.60 17.16 670 655 2.23%

  Earnings / Share Earn. Growth P/E Ratios 16 EPS Range
Co. 2011 2012 2013 2014 2015 2016 2017 13-14 14-15 15-16 2014 2015 2016 High Low Range

LLY 441 339 415 278 343 356 400 -33.01% 23.38% 3.79% 26.81 21.73 20.94 360 352 2.25%
MCK 486 638 633 835 1111 1208 1301 31.91% 33.05% 8.73% 14.86 11.17 10.27 1375 1332 3.56%
MDT 337 346 375 382 428 466 519 1.87% 12.04% 8.88% 21.45 19.14 17.58 470 460 2.15%
MRK 377 382 349 349 359 376 388 0.00% 2.87% 4.74% 16.86 16.39 15.65 377 365 3.19%
NVO 102 142 167 162 201 222 233 -2.99% 24.07% 10.45% 22.01 17.74 16.06 232 225 3.15%
NVS 378 389 501 523 483 473 491 4.39% -7.65% -2.07% 13.59 14.71 15.03 541 444 20.51%
PFE 231 219 222 226 220 246 268 1.80% -2.65% 11.82% 14.13 14.51 12.98 251 232 7.72%
PRGO 401 499 561 639 773 702 769 13.90% 20.97% -9.18% 13.62 11.26 12.40 840 805 4.99%
RHHBY 140 162 156 156 175 187 200 0.00% 12.18% 6.86% 18.47 16.47 15.41 192 184 4.28%
SNY 348 319 340 345 282 305 297 1.47% -18.26% 8.16% 11.26 13.77 12.73 317 315 0.66%
STJ 328 239 376 398 394 401 440 5.85% -1.01% 1.78% 19.59 19.79 19.44 411 400 2.74%
SYK 372 407 423 473 512 578 638 11.82% 8.25% 12.89% 24.16 22.32 19.77 598 570 4.84%
TEVA 497 535 501 507 542 519 586 1.20% 6.90% -4.24% 8.35 7.81 8.15 540 506 6.55%
TMO 416 494 542 696 739 824 929 28.41% 6.18% 11.50% 21.15 19.92 17.87 819 810 1.09%
ZBH 480 530 575 606 690 797 883 5.39% 13.86% 15.51% 20.22 17.76 15.38 808 790 2.26%
ZTS 0 108 142 153 173 191 232 7.75% 13.07% 10.40% 31.74 28.07 25.42 190 184 3.14%

Sector Average           15.37% 6.84% 11.03% 18.25 17.63 15.77     7.58

Disclosure: I am/we are long ABC, ABT, AMGN, CAH, GILD, NVO, STJ, SYK.