Updated on March 26th, 2020 by Josh Arnold
The healthcare sector is a great place to find high-quality dividend growth stocks. For evidence of this, look no further than the list of Dividend Aristocrats.
The Dividend Aristocrats are a select group of 64 stocks in the S&P 500 Index, with at least 25 consecutive years of dividend increases. There are currently 6 Dividend Aristocrats that come from the health care sector.
You can download an Excel spreadsheet of all 64 (with metrics that matter like dividend yields and price-to-earnings ratios) by clicking the link below:
It is easy to see why health care stocks make for excellent long-term investments. The U.S. health care sector widely enjoys high profitability with strong cash flows. After all, people often cannot go without health care, even in difficult economic climates.
And, with an aging population, the U.S. healthcare industry is expected to see robust demand for a variety of healthcare products and services going forward. Lastly, healthcare will see even greater demand due to the spreading coronavirus crisis.
The rankings in this article are derived primarily from our expected total return estimates for every healthcare dividend stock found in the Sure Analysis Research Database. We further narrowed down the list by selecting only U.S.-based companies, with a Dividend Risk score of C or better.
For investors interested in high-quality dividend growth stocks, this article will discuss the top 7 dividend-paying health care stocks to buy now.
Table Of Contents
The 7 best health care stocks are listed below in order of total expected returns over the next 5 years, from lowest to highest. You can instantly jump to any individual stock analysis by clicking on the links below:
- Johnson & Johnson (JNJ)
- UnitedHealth Group (UNH)
- McKesson Corporation (MCK)
- Bristol-Myers Squibb Company (BMY)
- Stryker Corporation (SYK)
- Pfizer Inc. (PFE)
- AbbVie Inc. (ABBV)
Health Care Stock #7: Johnson & Johnson (JNJ)
Johnson & Johnson is an obvious candidate for this list, as it maintains the longest streak of annual dividend increases of any healthcare stock. It is also the only healthcare company on the list of Dividend Kings, a group of just 30 stocks that have increased their dividends for at least 50 consecutive years. You can see the full list of Dividend Kings here.
Johnson & Johnson is a diversified health care company that sells a variety of pharmaceuticals, medical devices, and over-the-counter consumer medical products. The company was founded in 1886 and now employs more than 125,000 people worldwide. Johnson & Johnson should produce about $85 billion in total revenue this year, and currently trades for a market capitalization of $314 billion, making it one of the largest health care companies in the world.
Source: Investor presentation, page 21
Johnson & Johnson enjoys a product portfolio with a staggering 26 different brands with at least $1 billion in annual revenue. In addition, nearly half of the 26 produce at least $2 billion in revenue per year, a feat few companies can match. This size and scale gives Johnson & Johnson many advantages with branding, consumer loyalty, and the ability to reinvest cash flow to develop the next generation of billion-dollar brands.
Johnson & Johnson reported fourth quarter and full-year earnings on January 22nd, and results showed a fractional increase in revenue year-over-year to $82.1 billion. However, excluding the impact of acquisitions and divestitures, revenue was up a more impressive 4.5%. Adjusted earnings-per-share came in at $8.68, a 6.1% gain over the prior year as the company continues to see higher revenue and a lower share count grow its earnings-per-share over time.
The company guides for sales growth of 4% to 5%, or around $85 billion for 2020. In addition, adjusted earnings-per-share should be between $8.95 and $9.10. Our current estimate is for $9.03 in earnings-per-share for 2020, although there is risk to this forecast due to a potential recession.
At the current share price of $119, the stock is trading for just over 13 times this year’s projected earnings. That compares favorably to our estimate of fair value at 15.8 times earnings, so we see a 3% to 4% tailwind to annual total returns as the valuation multiple rises.
Shares also yield 3.2% currently, and we expect 6% annual earnings-per-share growth. Combining these factors, we see Johnson & Johnson producing 12.3% total annual returns in the next five years, making it the seventh-best healthcare stock in our coverage universe for total projected returns.
Health Care Stock #6: UnitedHealth Group (UNH)
UnitedHealth is a health care services provider which offers global healthcare services to tens of millions of people via a wide array of products. The company has two major reporting segments: UnitedHealth and Optum. The former provides global healthcare benefits to individuals, employers and Medicare/Medicaid beneficiaries.
The Optum segment is a services business that seeks to lower healthcare costs and optimize outcomes for its customers. UnitedHealth’s market capitalization is $209 billion and it produces $260+ billion in annual revenue.
UnitedHealth reported fourth quarter and full-year earnings on January 15th and results once again showed strong growth.
Source: Earnings release, page 2
Total revenue was up 7.1% to $242 billion, with roughly equal contributions in dollar terms from the UnitedHealthcare and Optum businesses, respectively. The Optum business continues to grow more quickly on a percentage basis, and margins are expanding more rapidly for that business as well.
Operating earnings were up nearly 14% for the company, with Optum producing most of that gain. In total, net operating margin rose 40bps to 5.7% of revenue in 2019.
The company guided for $16.25 to $16.55 in earnings-per-share for this year, but given UnitedHealth’s history of offering up relatively soft guidance, and then beating it, we expect to see actual earnings come in at the top of the range, at $16.50 per share.
Using a recent share price of $234, UnitedHealth is trading for just over 14 times earnings. This compares favorably to our estimate of fair value at 16 times earnings, and the stock should see a small tailwind to total returns in the next five years as a result.
UnitedHealth has experienced rapid dividend growth in recent years, but those dividend increases haven’t been able to keep pace with share price growth, so the current yield is just 1.8%. However, combined with the tailwind from the valuation, our projection of 9% annual earnings-per-share growth and the 1.8% yield should produce attractive total annual returns of 13.2%.
Health Care Stock #5: McKesson Corp. (MCK)
McKesson is one of the “Big 3” health care distribution companies in the United States. McKesson Corporation traces its lineage to 1833 when its founders began to offer wholesale chemicals and pharmaceuticals in New York City. In the nearly 200 years since, McKesson has grown into a powerhouse and today, generates $228+ billion in annual revenue and trades with a ~$22 billion market capitalization.
Source: Investor presentation, page 3
McKesson reported third quarter earnings on February 4th, with results beating consensus estimates for both the top and bottom lines. Revenue increased 5% year-over-year to $59 billion, and adjusted for forex translation, revenue would have risen 6%. Growth in the US Pharmaceutical and Specialty Solutions segment drove the top-line increase thanks to higher pricing and volumes.
Adjusted earnings came to $3.81 per share during the quarter, up 12% year-over-year thanks to higher revenue and a lower share count. McKesson returned $2.2 billion in cash to shareholders through the first nine months of the current fiscal year, with $1.9 billion in share repurchases and the balance in dividend payments.
Guidance is for earnings-per-share of $14.60 to $14.80 after the company raised it following Q3 results. Of course, investors should be on notice for a reduction or withdrawal of guidance based on the precarious economic situation due to coronavirus. Our current estimate is towards the top end of the range at $14.75, but this is subject to change.
On the current share price of $121, McKesson trades for just 8.2 times earnings. That compares quite favorably to our fair value estimate of 12 times earnings, driving a projected ~8% annual tailwind to total returns from the valuation alone. We also expect McKesson to produce 6% annual earnings-per-share growth, and the stock yields 1.4%. Combined, these factors could generate total returns in excess of 15%, making McKesson quite attractive for value and dividend growth investors.
Health Care Stock #4: Bristol-Myers Squibb Company (BMY)
Bristol-Myers Squibb is the product of a 1989 merger between Bristol-Myers and Squibb. However, the company can trace its origins back much further, to 1887. Today, the company is a drug maker that focuses on cardiovascular and cancer therapies. Bristol-Myers has a market capitalization of $111 billion, and should produce around $42 billion in revenue this year.
Bristol-Myers posted Q4 and full-year results on February 6th, with results showing strong improvements in revenue and earnings. Adjusted earnings-per-share rose 18% for the year to $4.69, while revenue jumped 16% higher to $26 billion.
Sales in the US soared 42%, while international markets rose 21% for the quarter. The gains accrued largely from the company’s 2019 purchase of Celgene, which closed in November. Sales of Eliquis, a blood clot medication, rose 19%. Opdivo, which treats certain cancers, fell 2% but still produced $1.8 billion of revenue.
SG&A costs were up 30% thanks to much higher research and development spending, as well as merger-related costs for Celgene. Gross margins fell 340bps to 68.6% due primarily to unfavorable mix.
The company also added $5 billion to its existing $1 billion share repurchase plan, good for about 5% of the current float.
Source: Investor presentation, page 15
The company guided for $6.00 to $6.20 in adjusted earnings-per-share for 2020, and our estimate is for the midpoint of that range at $6.10. On today’s share price of $49, Bristol-Myers is trading for just over 8 times earnings. That is well below our estimate of fair value at 13.5 times earnings, so we see an 11% tailwind to total returns from the valuation alone. Bristol-Myers hasn’t been as cheap as it is today at any point in the past decade.
Shares currently yield 3.6%, and we expect annual earnings-per-share growth of 4%. These factors, combined with the valuation expansion tailwind, could produce 17.5% annual total returns in the coming years.
Health Care Stock #3: Stryker Corporation (SYK)
Stryker Corporation is a global leader in the booming medical device industry. The company produces a wide array of surgical equipment, neurovascular products, and orthopedic implants. It was founded in 1941 and today, it employs more than 33,000 people around the globe.
The company reported fourth quarter and full-year results on January 28th, with the company topping estimates for both the top and bottom lines. Revenue for the year rose 9.4% to $14.9 billion, and marked the 40th consecutive year the company has produced higher year-over-year revenue. Earnings-per-share came to $8.26, up 13.5% from 2018.
Organic growth totaled 8.1% for the year, driven by broad-based strength in all of its segments. Adjusted gross margins were down 20bps to 65.9% of revenue for the year, but adjusted operating margins were up 40bps for 2019 to 26.3% of revenue.
The company guided for organic growth of ~7% in 2020 and adjusted earnings-per-share of $9.00 to $9.20. Our estimate is the midpoint of that range at $9.10. Again, these forecasts can (and likely will) be altered once the impact of a coronavirus-related economic shutdown is factored in.
Source: Investor presentation, page 6
Stryker has a long and successful track record with acquisitions, as seen above. The most recent target is Wright Medical (WMGI), a leader in certain extremities and biologics markets. The acquisition fits Stryker’s playbook of acquiring leaders in various niche markets it wants to address. This has been key to its long-term growth, and we think it will continue given the company’s strong profitability and cash generation.
Stryker trades for approximately 16.9 times this year’s earnings estimate of $9.10. That is higher than many other stocks in the healthcare space, but quite low for Stryker. Indeed, Stryker hasn’t traded for this sort of valuation since 2012. We see fair value at 23 times earnings, implying a sizable 6%+ tailwind to total annual returns from a rising valuation.
Combined with the company’s 10% projected annual earnings-per-share growth, and the 1.5% dividend yield, Stryker could produce 18% annual total returns over the next five years.
Health Care Stock #2: Pfizer Inc. (PFE)
Pfizer is a global pharmaceutical company that produces prescription drugs and vaccines. The company produces about $46 billion in annual revenue and has a market capitalization of $165 billion.
Pfizer reported fourth quarter and full-year earnings on January 28th, and showed weak results, as expected. Revenue was down 8% during the quarter against the comparable period in 2018, while adjusted earnings-per-share fell 13% to $0.55.
Revenue in the Biopharma segment was up 7%, driven by a 22% increase in Eliquis sales, a 15% increase from Ibrance, a 29% increase from Xtandi, and others. Loss of exclusivity for Lyrica caused a 15% decline in the top line for Upjohn. For the full year, company-wide revenue was down 4% to $51.8 billion.
Pfizer is conducting a spinoff of its Upjohn segment to combine with Mylan, creating the largest generic drug company in the world. The new company will be named Viatris and Pfizer shareholders will own 57% of the combined company. As a result, guidance below is for the remaining Pfizer, which the company has called “New Pfizer”.
Source: Investor presentation, page 14
Revenue should be between $41 and $42 billion for 2020, with adjusted earnings-per-share coming in around $2.30 for the new company. The Upjohn segment should contribute ~$0.40 to earnings-per-share this year, creating our full-year estimate for Pfizer of $2.69 in earnings-per-share. At today’s price, shares trade for 11.1 times earnings, which compares favorably to our fair value estimate of 17 times earnings, implying a 9% tailwind from a higher valuation.
We expect Pfizer to grow EPS at 6% annually in the coming years, and the current yield is just over 5%. In total, we expect Pfizer to produce 18.3% total annual returns in the next five years.
Health Care Stock #1: AbbVie Inc. (ABBV)
Our top-ranked health care stock is pharmaceutical giant AbbVie. AbbVie is a pharmaceutical company focused on Immunology, Oncology, and Virology, and was spun off by Abbott Laboratories in 2013. Today, AbbVie generates annual revenue in excess of $35 billion.
AbbVie’s most important product by far is Humira, which by itself represents over half of the company’s annual revenue. Humira is a multi-purpose pharmaceutical product, and is the top-selling drug in the world.
Humira is now facing biosimilar competition in Europe, which has had a noticeable impact on the company. Generic competition will continue to rise as patent protections around the world expire in the coming years, and Humira revenue is eventually expected to fall to a negligible level.
AbbVie reported fourth quarter and full-year earnings on February 7th, with results coming in strong once again. Revenue was $8.7 billion for the quarter, a year-over-year gain of 4.7%. Imbruvica continues to be a growth driver, adding 29% to its top line year-over-year to $1.3 billion. Humira sales were in line with Q3 at $4.9 billion for the quarter, but as mentioned, we expect this to fall fairly precipitously in the coming years.
AbbVie earned $2.21 per share for Q4, up 16% year-over-year. Guidance for this year is for $9.61 to $9.71, and our estimate is for the midpoint of the guidance range at $9.66. This guidance range does not include any contributions from the Allergan acquisition, which is now slated to close in the second quarter of 2020.
Source: Investor presentation, page 4
AbbVie has done an excellent job of producing strong returns from its research and development investments over time. The company has seen its annual R&D spending reach $5 billion, but it has also received 14 major approvals since 2013, with most of those coming in the core categories of Immunology and Oncology. We think this strong R&D pipeline will afford AbbVie strong growth in the coming years organically.
However, AbbVie’s growth will also be significantly boosted by the blockbuster acquisition of Allergan, which has a large product portfolio of its own, including its most well-known product Botox.
Source: Investor Presentation
The acquisition accomplishes a number of strategic goals for AbbVie, such as broadening and diversifying its product offerings by adding exposure to new segments. It also enhances AbbVie’s position in multiple existing categories. The deal instantly makes AbbVie a global powerhouse. The combined company will have annual revenues of just over $50 billion, based on 2020 estimates.
Profit growth will also follow, as AbbVie expects the transaction to be 10% accretive to adjusted earnings-per-share over the first full year following the close of the transaction, with peak accretion of greater than 20%.
The combined company should produce around $19 billion in annual adjusted net income, so the new share count of ~1.8 billion for AbbVie following the close of the transaction should produce annualized earnings-per-share of something like $10.55.
Since this is significantly higher than AbbVie’s 2020 financial guidance of ~$9.66 in adjusted earnings-per-share and does not account for any synergies, we believe that the merger will indeed be accretive for AbbVie, especially if the company can achieve its target $2 billion in synergies post-merger.
AbbVie was already an undervalued stock before the acquisition was announced, and we still believe it is. Based on expected earnings-per-share of ~$9.66 for 2020, AbbVie stock trades for a price-to-earnings ratio of just 7.
We believe AbbVie deserves a P/E ratio of at least 10.5, which represents our fair value estimate for the stock. An expanding P/E multiple to our fair value estimate of 10.5 would boost shareholder returns by approximately 8.4% per year over the next five years. We recently moved our fair value estimate down from 13 times earnings to 10.5 to account for declining Humira revenue, but even with this lower fair value target, AbbVie is very cheaply priced today.
Lastly, the stock has a current dividend yield of 7.0%, a very high yield resulting from both a declining share price and the company’s high rate of dividend growth. AbbVie is a Dividend Aristocrat, and has a highly impressive track record of dividend increases.
With a low payout ratio and future growth catalysts, we believe AbbVie’s dividend is secure, with ample room to grow. The Allergan transaction should improve both safety and growth prospects for the dividend, so we find the transaction to be highly attractive.
With expected EPS growth of 5.5% through 2025, AbbVie’s total expected returns should come in around 19% per year over the next five years, making it our top health care stock today. AbbVie offers a very high yield, a diversified product portfolio with strong growth prospects, dividend safety, and a very cheap valuation, and we rate it a strong buy as a result.