These 10 S&P 500 Health Care Companies Are the Most Shareholder Friendly

Which health care companies have traditionally been the most shareholder friendly? Turns out Pfizer (PFE) , which agreed on Monday to merge with Allergan (AGN) , is one of them. But what about the rest of the sector?

Health care companies have been actively returning capital to shareholders over the past 10 years, but not all of its sub-industries were active participants. However, that may change, particularly as several biotech companies start to mature, according to a report by S&P Capital IQ.

"Biotech has been increasingly active in repurchasing shares during the past five years," the Oct. 19 report said. "We expect these trends to continue in the next several years, and we anticipate that more biotech companies will engage in similar capital deployment activities in the future as their businesses mature and they begin generating steady cash flows. Although we do not anticipate biotech to overtake the pharmaceutical industry."

S&P 500 companies are increasingly deploying cash to shareholders via stock repurchases and dividend payouts, and with more than $1 trillion in cash on their balance sheets as of June, that trend is likely to continue, according to S&P Capital IQ.

Two of the top 10 S&P 500 companies with the most buybacks and dividends combined from 2005 to 2014 were health care companies.

Overall, the health care sector paid out $286.8 billion in dividends and repurchased $502 billion in stock for the 10 years through 2014. The sector also generated $1.2 trillion in cash flow from operations over the same time period, which equated to dividend and buyback activity representing 64.8% of total cash flow from operations, the report said.

"Health care companies have witnessed healthy buyback and dividend activity in the past few years," the Oct. 19 report said. "Most S&P 500 pharmaceutical companies repurchase stock and pay dividends, and it recently was the only health care subindustry with a dividend yield (2.5%) above the market's (2.2%)."

So which health care companies have led the way with the most returned capital to shareholders over the past 10 years? Here's the list, in order of least to most, along with ratings from TheStreet Ratings for additional perspective.

TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equity market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a buy yielded a 16.56% return in 2014, beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a buy yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

Note: Year-to-date returns are based on Nov. 20 closing prices.

MDT Chart MDT data by YCharts

10. Medtronic Plc (MDT)
Industry: Health Care/Health Care Equipment
Year-to-date return: 4.7%

Total Returned Capital 2005-2014: $24.4 billion
Dividends 2005-2014: $8.44 billion
Buybacks 2005-2014: $15.96 billion

TheStreet Said: TheStreet Ratings team rates MEDTRONIC PLC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

We rate MEDTRONIC PLC (MDT) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, reasonable valuation levels, good cash flow from operations, largely solid financial position with reasonable debt levels by most measures and solid stock price performance. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • MDT's very impressive revenue growth greatly exceeded the industry average of 37.8%. Since the same quarter one year prior, revenues leaped by 70.2%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has significantly increased by 163.22% to $816.00 million when compared to the same quarter last year. In addition, MEDTRONIC PLC has also vastly surpassed the industry average cash flow growth rate of -14.68%.
  • MDT's debt-to-equity ratio of 0.67 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Even though the debt-to-equity ratio shows mixed results, the company's quick ratio of 2.98 is very high and demonstrates very strong liquidity.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • You can view the full analysis from the report here: MDT


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