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As worries about inflation and rising interest rates dominate the news, one place investors are looking for stability and safety is health care multinational stocks.
During the technology stock boom in recent years, these solid, mature businesses were considered boring and predictable. Now, they’re taking on a new appeal for exactly those reasons. With their size comes financial stability and products that are always in demand.
That means strong cash flows and growing dividend streams along with share price appreciation in all conditions. Some are so-called dividend aristocrats, an elite group of public companies that have raised their dividends in each of the past 25 years.
“Large cap health care companies are superior goods,” says Paul MacDonald, chief investment officer and portfolio manager at Harvest Portfolios Group Ltd. in Oakville, Ont. “We need them all the time. They’re not immune to recession, but they’re very much insulated from it.”
Mr. MacDonald manages Harvest Healthcare Leaders Income ETF HHL-T, the largest Canadian health care exchange-traded fund (ETF). It has $954-million in assets under management (AUM) and holds 20 of the largest global health care companies. Four of the 20 holdings are dividend aristocrats and another seven are close, having increased their payments in most years, but without a perfect record.
“That includes three recessions, which suggests the dividends are safe and the probability of increases is also high,” he says.
Nick Kalivas, head of factor and core equity strategy, ETFs at Invesco Ltd. in Chicago, says health care offers defensive growth, much like consumer staples companies that sell groceries and household goods and many real estate investment trusts.
“Demand is pretty inelastic,” he says. “If you get sick you have to go to the doctor regardless [of the state of the economy].”
Invesco markets Invesco S&P 500 Equal Weight Health Care ETF RYH-A, which has 66 holdings with US$910-million in AUM. Many of the holdings overlap with Harvest Healthcare Leaders Income ETF.
Mr. MacDonald and Mr. Kalivas both say that the health care sector has several favourable secular themes over the medium to longer term. The first is aging populations in developed markets. An older demographic spends more money on health, including drugs, medical supplies and surgical procedures. The second is technological and product innovation.
Mr. Kalivas says this innovation includes medications and treatments. Things such as robot-assisted surgeries and new medical devices fall into this category. They mean less invasive surgeries, leading to faster healing, reduced hospital stays and, therefore, increased demand.
The third trend is growth in emerging markets where demand for basic services is rising with incomes. Mr. MacDonald notes that pre-pandemic, health care expenditures in China and India were growing at a 14 per cent annual compound rate, about two and a half times that of the U.S.
Inflationary pressures have less of an impact on these companies, too. They sell high-margin products and can absorb some price increases and pass some on. They have less exposure to the rising price for commodities as their products are less tied to these raw materials.
Stock picks in the space
“If you’re looking for dividend growth, I would put them at the top of the list. They’re great, well-positioned companies,” he says.
The total dividends per share these four companies have paid over the past 25 years illustrate their quality, he adds. Johnson & Johnson has paid US$50.65 a share over that period, Merck paid US$40.79, UnitedHealth paid US$29.70 and Pfizer paid US$22.27.
Johnson & Johnson, with its consumer health, pharmaceutical and medical devices segments, has raised its dividend in each of the past 50 years, according to the company’s website. The shares are currently yielding 2.5 per cent.
Merck is one of the largest global pharmaceutical companies with leading products such as Keytruda, a cancer drug, and HPV vaccine Gardasil. It’s the second largest player in animal health. Its current yield is 3 per cent.
UnitedHealth is the seventh-largest U.S. company by revenue in the Fortune 500 ranking. It offers health insurance to individuals and companies and administers things such as Medicare. Its stock has a current dividend yield of 1.2 per cent.
Mr. MacDonald says Pfizer is a top choice for growth and income. He estimates it has 60 per cent of the global market for COVID-19 vaccinations and oral antiviral treatments where Paxlovid is a leading product. He expects these medicines to generate US$54-billion in 2022 and US$33-billion next year.
The company is putting its COVID-19 vaccine windfall to use with acquisitions and reinvestments.
“There’s no question Pfizer has been the winner,” he says.
Mr. Kalivas notes that health care distributors have performed well this year. This group includes companies such as Cardinal Health Inc. CAH-N, which distributes drugs and medical products to more than 100,000 hospitals and pharmacies. McKesson Corp. MCK-N is another name in this area.
Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.
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