In the unpredictable business environment of 2022, healthcare stocks have shown extraordinary resilience, outperforming their market counterparts. This strength is attributed to the sector’s stability in terms of revenue and earnings, which assures their potential for consistent dividend payout irrespective of the current economic conditions.
However, it’s important to remember that not all healthcare stocks are the same. Our attention is drawn to three particular stocks that are primed for both substantial dividends and strong long-term growth. The ones to watch, regardless if a recession strikes in 2023 or not, are those that offer a diversification element to strengthen an investment portfolio.
First up is Pfizer (NYSE:PFE), a global pharmaceutical giant known for discovering, developing, and selling a wide range of medications and vaccines. Pfizer’s portfolio covers treatments for various ailments including cardiovascular and metabolic diseases, Covid-19, pneumococcal disease, inflammatory disease, hemophilia, and endocrine diseases.
Established in 1849, Pfizer is predicted to generate around $100 billion in revenue in 2022, with a current market capitalization of $287 billion. While not boasting the longest dividend increase streak, Pfizer has significantly stepped up in this respect over the volatile past 13 years.
Currently yielding at 3.2%, Pfizer’s dividend yield aligns with historical norms and is about double that of the S&P 500, solidly positioning it as an income stock. However, it’s worth mentioning that Pfizer’s payout ratio stands at only 25% of this year’s earnings. This indicates a secure dividend, even in the face of a severe economic downturn. The low ratio also suggests potential for future increases, with the company’s research and development (R&D) needs comfortably covered by earnings and cash flows.
We foresee an annual earnings per share growth rate of about 5% in the coming years, signaling not only a likely increase in share price over time but also additional capital for dividend raises. In addition, Pfizer’s shares trade at about eight times this year’s estimated earnings, significantly below our fair value estimate of 11 times.
Next, we turn to Medtronic (NYSE:MDT), a company that designs, manufactures, and distributes medical devices worldwide. A 25% year-to-date (YTD) drop in Medtronic’s stock price has made it a value pick among healthcare stocks.
Founded in 1949, Medtronic generates around $30 billion in annual revenue and has a current market cap of $103 billion. The company has an exceptional dividend increase streak of 45 years, proving its mettle by withstanding various economic storms.
With a yield of 3.5% today, Medtronic’s dividend yield surpasses the S&P 500’s and also outperforms the company’s own historical average yield of about 2%. This presents it as a potential value buy. Its payout ratio is just over half of this year’s earnings—an indication of a secure dividend, despite some noticeable earnings volatility in recent years.
Our third and final selection, UnitedHealth (NYSE:UNH), is a diverse healthcare provider operating in the U.S. UnitedHealth operates four major segments – UnitedHealthcare, Optum Health, Optum Insight, and Optum Rx – offering a range of services, from health benefit plans to health management services, software and advisory services, and pharmacy care, among others.
Created in the late 1970s, UnitedHealth generates roughly $325 billion in annual revenue with a market cap of $500 billion. The company’s dividend-increase streak is similar to Pfizer’s, at 13 years. However, UnitedHealth has consistently demonstrated a willingness and ability to significantly increase its dividends, making it a strong contender among dividend growth stocks.
Although the yield is a modest 1.2%, the payout ratio for the year is a mere 30%, reflecting strong potential for substantial dividend growth in the coming years. Additionally, we predict a 12% EPS growth in the years ahead, enabling UnitedHealth to supply its management team with ample capital. This ability to consistently grow revenue year after year makes UnitedHealth not only an attractive dividend stock but also a great choice for capital appreciation.
In conclusion, the three healthcare stocks we’ve discussed not only highlight the sector’s potential for substantial dividends but also offer promising prospects for capital appreciation. Pfizer, with its steady income and potential for growth, Medtronic, with its notable dividend increase streak, and UnitedHealth, with its rapid dividend growth, all would make invaluable additions to any investment portfolio.
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