No one gets to choose when they get sick. That's a big reason the demand for healthcare tends to remain stable even during periods of economic stress. For income investors, this means some healthcare stocks can be looked upon as reliable dividend payers.
But which healthcare stocks in particular do we think are great income investments? We asked that question to a team of expert healthcare investors, and they picked AstraZeneca (NYSE: AZN), Medtronic (NYSE: MDT), and AbbVie (NYSE: ABBV).
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This pharma stock could be entering a long-tailed growth trend
George Budwell (AstraZeneca): The British pharma titan AstraZeneca sports both a top-notch yield of 5.63% at present, as well as a worryingly high trailing-12-month payout ratio of 104% that may scare away more conservative investors. The long and short of it is that the fate of Astra's sky-high yield is almost certainly going to depend on the upcoming top-line readout for its checkpoint inhibitor, Imfinzi (durvalumab), in non-small cell lung cancer (NSCLC).
The trial, known as "Mystic," could transform Imfinzi into one of the top-selling checkpoint inhibitors -- possibly surpassing both Merck's Keytruda and Bristol-Myers Squibb's Opdivo. At the very least, though, a successful readout for this critical indication should push Imfinzi into the top 10 best-selling drugs by 2022, according to EvaluatePharma. And if this line holds, Astra's payout ratio should drop to far more reasonable levels within just a few short years.
On the other hand, a failure in this trial could spell disaster for both Astra's plan to return to growth in the near term, as well as its above-average yield. The company, after all, is still reeling from a string of former star drugs losing exclusivity. As proof, Astra's top line is forecast to fall by a noteworthy 7.1% this year.
The bottom line is that Astra's stock, and its juicy yield, should turn out to be outstanding bargains if Imfinzi hits the mark in Mystic. In the same breath, a negative outcome would probably force a hefty reduction in the drugmaker's yield and certainly dampen its growth prospects moving forward. So, while Astra's high-yield may be enticing, investors may want to exercise caution until the results of Imfinzi's all-important Mystic trial are released.
How does 17% annual dividend growth over 40 years sound?
Sean Williams (Medtronic): While medical device giant Medtronic doesn't have the highest yield among healthcare stocks -- it yields 2%, which is pretty much on par with the broad-based S&P 500 -- it does belong to a very rare class of dividend stocks known as Dividend Aristocrats. To be part of this exclusive club, companies need to have increased their payouts for at least 25 straight years. In Medtronic's case, its dividend has grown for 40 consecutive years at a compound annual rate of 17%, according to the company. Thus, the implication is that the only reason Medtronic's yield is so "average," at 2%, is because its share price keeps moving higher (since yield is a function of share price). Sounds like a great problem to have!
However, there's a lot more to like about Medtronic than just the fact that it's been able to increase its payout every year for four decades. What might be most intriguing about Medtronic is the role it should play over the long run. As a medical device company, sales growth rates have been somewhat constrained recently, especially in the U.S., by competition and healthcare law uncertainty. But as the U.S. and global populations age -- and make no mistake, life expectancies are rising in far more countries than they're falling -- the importance of medical devices as a means to improve the quality of life will come into focus. In other words, Medtronic's growth rate is actually back-end loaded and should get stronger over time.
What's more, Medtronic has a pretty substantial opportunity to expand its presence in emerging markets. Emerging market economies can often withstand global slowdowns in developed markets, which means the greater the presence Medtronic can achieve in these markets, the more stable its long-term growth rate. In full-year fiscal 2017, Medtronic reported 9% constant currency growth in emerging markets, compared to just 1% sales growth in the U.S. Yet, emerging markets only represent 13.6% of total sales, leaving Medtronic plenty of room to lift its long-term growth rate by focusing its attention on emerging markets.
If you need an income stock to set and forget for a few years or decades, strongly consider a medical device giant like Medtronic.
Life beyond Humira
Brian Feroldi (Abbvie): Investors have kept pharma giant Abbvie's valuation low for a few years now over concerns that its cash-cow drug, Humira, is going to die a slow death. Those fears are being stoked by biosimilar drug competition from companies like Amgen and Coherus Biosciences, which could steal market share once they come to market.
Those worries make sense since Humira accounts for more than two-thirds of the company's total revenue. However, AbbVie's management team has long insisted that it will be able to keep biosimilar competition at bay until 2022. That gives the company a lot of time to move its exciting pipeline forward and lower its dependence on Humira.
So, what hit drugs could Abbvie have up its sleeve? While the company's pipeline is impressive, four drug candidates in particular -- Rova-t, Upadacitinib, Elagolix, and Glecaprevir -- have captured my attention. All four of these drugs promise multibillion-dollar sales potential and could greatly help to change the company's story away from the risks surrounding Humira. While it is unlikely they will turn out to be winners, if a few of them live up to their full potential, then Abbvie's financial future is looking up.
In the meantime, it's worth remembering that AbbVie is still in firmly in growth mode. In fact, industry watchers expect AbbVie's bottom line to grow by more than 14% annually over the next five years. And yet, in spite of its double-digit growth potential, 3.5% dividend yield, and exciting late-stage pipeline, Abbvie's shares are currently trading for less than 11 times forward earnings. I think that's an attractive enough valuation to justify the Humira risk, which makes this a great stock for income investors to jump on today.
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Brian Feroldi has no position in any stocks mentioned. George Budwell has no position in any stocks mentioned. Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of Medtronic. The Motley Fool has a disclosure policy.