Better Buy: Welltower Inc. vs. Universal Health Services, Inc.

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America is getting older, and the demographic shift is driving up demand for healthcare facilities and services. This long-term trend should supply the nursing homes in Welltower Inc.'s (NYSE: HCN) portfolio and the hospitals that Universal Health Services, Inc. (NYSE: UHS) operates with a steady stream of patients well into the foreseeable future.  

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Which of these two healthcare stocks is best positioned right now to deliver market-beating returns in the years to come? Let's take a look at each to find out.

The case for Welltower Inc.

The Census Bureau predicts the number of Americans over 65 years old will nearly double, from 43 million in 2012 to 83 million in 2050. That's good news for this real estate investment trust (REIT) and the senior-housing facilities in its portfolio of 1,375 properties. 

About 70% of Welltower's properties are of the senior-housing variety, and the rest are long-term care and outpatient medical facilities. About 64% of this REITs total revenue is generated in partnership with operators of the senior housing facilities it owns, such as Brookdale Senior Living

THis company also takes a hands-off approach with triple-net leases that leave operators responsible for a myriad of business expenses that add up fast. Although the seniors-housing operating segment generated 64% of the REIT's total revenue in the first half of the year, the hands-off triple-net segment delivered $63 million more to total net operating income during the period.

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While I like the predictable revenue that triple-net leases generate, I think Welltower's willingness to partner with operators in need of financing could help the REIT stay on top of a rapidly shifting market. REITs like Welltower own just 15% of a $1 trillion domestic healthcare real estate market. Not every operator is willing to completely separate the real estate side of their business from day-to-day operations -- at least not yet.

This flexibility has allowed Welltower to increase trailing funds from operations (FFO) by about 29% over the past five years and, in turn, its dividend, which currently offers a juicy 4.85% forward yield. The company expects FFO per share to reach at least $4.15 this year, which gives it plenty of room to boost future dividend payments above the annualized $3.48 they offer now.

The case for Universal Health Services, Inc.

Unlike Welltower, this isn't a stock you buy for the dividend. At recent prices, this stock offers a measly 0.4% yield, although the company has been returning profits in the form of share buybacks that have lowered the outstanding count by about 3.4% over the past three years.

Obamacare-repeal uncertainty and the rising popularity of high-deductible health plans haven't been kind to this hospital operator's acute-care division. Universal Health Services recently lowered its expected range for full-year adjusted earnings down 2.5%, to between $7.70 and $8.20 per share.

Although acute-care facilities are feeling a bit pinched lately, Universal Health's higher-margin behavioral-health-segment revenue grew about 5.8% in the first half as compared to the same period last year. Looking further ahead, the company's expected to grow earnings at a 7.8% annual rate over the next five years.

The better buy

Universal Health Services stock looks pretty cheap for a well-established company expected to grow its bottom line at a high single-digit pace. Lately, the company's shares have been trading at just 14.2 times this year's expected earnings, while the average stock in the S&P 500 has been trading for about 18.7 times forward estimates.

If the outlook for acute-care hospitals improves, Universal Health Services stock could provide market-beating gains in the long run. Unfortunately, I expect high-deductible health plans, which encourage patients to avoid surgery whenever possible, to become even more widespread as employers struggle to keep up with soaring costs.

Welltower, on the other hand, isn't nearly as exposed to trends pressuring the acute-care market. With most of its portfolio geared toward housing older adults, the huge demographic shift should keep demand for the facilities it owns and the dividends it pays rising steadily for many years to come. That makes this healthcare REIT the better buy right now.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool recommends Welltower. The Motley Fool has a disclosure policy.