Going grey may not be fun, but aging baby boomers are creating opportunities for investors of all ages.
In North America, the postwar cohort can be roughly defined as those born between 1946 and 1965. Health care and financial services are among the sectors that can benefit from this investment play.
While riding this theme is compelling, investors still need to be mindful of stock valuation and criteria, such as the quality of a company's balance sheet and strength of management.
We asked three portfolio managers for their top picks among stocks that should benefit from this demographic tailwind.
Pierre Trottier, portfolio manager with Industrial Alliance Investment Management, Quebec City
- The pick: Zimmer Biomet Holdings Inc.
- 52-week range: $95.63 (U.S.) to $133.49 a share
- Annual dividend: 96 cents a share for a yield of 0.83 per cent
This United States-based medical device maker focuses on artificial knees and hips. Zimmer is the leader in the orthopedic market with about a 35-per-cent share, compared with 25 per cent together for Johnson & Johnson and Stryker Corp., Mr. Trottier says. Zimmer's stock tumbled in July after activist investor Jana Partners LLC took a stake in the company and Zimmer's chief executive officer, David Dvorak, resigned. The search is on for a new CEO who can make strategic changes instead of just buying back shares, Mr. Trottier said: "It's more of a turnaround story." Zimmer shares, which trade at about 13.5 times forecast 2018 profit, compared with 20 times for Stryker, is a value play that requires an investment horizon of at least 18 months, he added.
- The pick: Morgan Stanley
- 52-week range: $30.62 (U.S.) to $48.90 a share
- Annual dividend: $1 a share for a yield of 2.11 per cent
Morgan Stanley will benefit from baby boomers investing for retirement, as its wealth-management arm has grown to represent nearly 60 per cent of revenue and earnings, says Mr. Trottier. Shares of its wealth-management rivals, such as TD Ameritrade Holding Corp. and Charles Schwab Corp., recently traded at 23 times 2018 profit, he noted. But Morgan Stanley, an investment banker, trades at about 12 times earnings, even though more than half of its business is its competitors' turf, he noted. Morgan Stanley, which also has strong management and a solid balance sheet, may eventually trade closer to 15 to 16 times forward earnings once the market recognizes the value of its wealth unit, he said. The company, which raised its dividend this summer, could pay $1.20 a share next year, he suggested.
Lorne Steinberg, president of Lorne Steinberg Wealth Management, Montreal
- The pick: Novartis AG
- 52-week range: $66.93 (U.S.) to $86.90 a share
- Annual dividend: $2.72 a share for a yield of 3.19 per cent
Shares of this Swiss drug giant will benefit from a growing senior population because it has an eye-care division focused on treating age-related disorders such as cataracts, glaucoma and macular degeneration, Mr. Steinberg said. Novartis's pharmaceutical division also markets drug treatments for the elderly, he said. They include Aclasta for osteoporosis, Comtan for Parkinson's disease, and its Exelon skin patch for Alzheimer's. Novartis has a strong balance sheet and an extensive pipeline of promising drugs, he noted. It also has been a consistent dividend grower over the past decade, and it trades cheaply at about 16 times forecast 2018 profit, he said. "We look at Novartis to deliver 10-per-cent earnings growth per year for the next few years."
- The pick: Sun Life Financial Inc.
- 52-week range: $41.48 to $53.75 a share
- Annual dividend: $1.74 a share for a yield of 3.68 per cent
An aging population will help drive Sun Life's health-insurance business, which also offers long-term-care and disability coverage, says Mr. Steinberg. More people are turning to personal health insurance as governments face rising medical-care costs in Canada, and hospital wait times increase for surgeries and procedures, he said. With more people saving for retirement, they need investment products, he added. Sun Life is a huge player in managing investments for defined-contribution pension plans offered by employers. The insurer will also benefit from rising interest rates as it holds cash from premiums to pay out claims, and a lot of it is invested in higher-yielding bonds. Sun Life's shares, he said, trade cheaply at about 11 times forecast 2018 profit.
Kamran Khan, portfolio manager at Norrep Capital Management Ltd., Toronto
- The pick: CVS Health Corp.
- 52-week range: $69.30 (U.S.) to $90.85 a share
- Annual dividend: $2 a share for a yield of 2.40 per cent
Shares of the U.S.-based drugstore giant and pharmacy benefit manager will profit from rising prescriptions as baby boomers grow older, says Mr. Khan. CVS Health, which has about 9,700 pharmacies, also operates more than 1,000 walk-in health clinics. Its pharmacy benefit management arm, which administers drug benefits, covers nearly 90 million people with health insurance from various organizations. CVS stock retreated this year due to a "softness in prescription volumes" after it lost a couple of major contracts to rival Walgreens Boots Alliance Inc., but "the big guys tend to win and lose contracts in any given year," he said. Shares of CVS, which did $4.5-billion in share buybacks last year, trade attractively at around 13 times forecast 2018 earnings, he added.
- The pick: HCA Healthcare Inc.
- 52-week range: $67 (U.S.) to $91.50 a share
- Annual dividend: None
An aging population should give the largest U.S. public hospital operator an extra boost to its admissions growth, says Mr. Khan. HCA has significant operations in Florida, the state with the highest concentration of seniors. The company has grown nicely over the past five years in revenue, hospital admissions and surgeries performed, he said. HSC can generate high, single-digit earnings growth over the long term after accounting for share buybacks, he said. The stock is off amid concerns about the repeal of the Affordable Care Act, also known as Obamacare, which would raise the number of uninsured, but that move appears unlikely, given President Donald Trump's difficulty in getting his agenda passed, he said. HCA's stock trades attractively at around 10 times forecast 2018 earnings, he added.