If you are looking for stable investments in the health care industry that will very likely provide decades of dividend growth, consider the three stocks outlined in this article.
More people are considering health care a basic human right. It really doesn't matter how you personally feel on the subject. Put politics aside, and you will see that's where opinion is trending.
On top of that, the global population is aging, especially in the developed world. More elderly means more expensive health care will be required in coming years. This may put a strain a strain on society as a whole, but it is great for the health care sector.
Another compelling aspect of the health care industry is the positive impact of technology. In many industries (think newspapers), technology advances hurt the largest players in the industry. Health care is different.
As technology makes it possible to save more lives, the largest health care corporations get more-and-more health products and treatments to sell. Advancing technology opens up new revenue streams for health care corporations because it allows for the treatment of previously untreatable illnesses.
It may not surprise you that some of the most stable, longest paying dividend stocks are in the health care sector.
Of the three discussed in this article, one has increased dividend payments for 30 consecutive years, another 40 years, and the final stock has increased its dividend payments for more than 50 consecutive years. That type of stability is very rare.
Decades of Dividends Health Care Stock: MedtronicMDT data by YCharts
The company was founded in 1949. Medtronic has an impressive streak of 38 consecutive years of dividend increases.
Medtronic's operations are split into four segments:
- Diabetes generates 6% of revenues
- Cardiac & Vascular generates 35% of revenues
- Restorative Therapies generates 25% of revenues
- Minimally Invasive Therapies generates 34% of revenues
Medtronic acquired Covidien in January of this year. The move has created significant synergies and possibilities for margin improvements through cost-cutting. In addition, Medtronic has been rapidly acquiring smaller health care companies to augment its growth.
In total, expect Medtronic to deliver earnings-per-share growth of between 7% and 9% a year over the next several years. In addition to this growth, the company currently offers investors a 2% dividend yield. This yield combined with expected growth gives investors estimated future total returns of 9% t 11% a year.
Medtronic stock appears to be trading around fair value at current prices. Medtronic has an adjusted price-to-earnings ratio of 18.3. Compare this to the S&P 500's current price-to-earnings ratio of 22.0.
Recessions do not significantly impact Medtronic. The company's products remain in demand throughout the economic cycle. To illustrate this point, take a look at Medtronic's earnings-per-share growth through the Great Recession of 2007 to 2009:
- 2007 earnings-per-share of $2.61
- 2008 earnings-per-share of $2.92 (12% increase)
- 2009 earnings-per-share of $3.22 (10% increase)
Medtronic's combination of a reasonable price-to-earnings ratio, stability through market cycles, and above-average total return prospects make it a compelling purchase at current prices.