Updated on July 9th, 2019 by Bob Ciura
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 stocks in the S&P 500 Index, with 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 57 (with metrics that matter) by clicking the link below:
It is easy to see why health care stocks make for excellent long-term investors. 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 going forward.
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 those stocks 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.
- UnitedHealth Group (UNH)
- Amgen (AMGN)
- Sanofi (SNY)
- McKesson Corp. (MCK)
- Cardinal Health (CAH)
- CVS Health Corporation (CVS)
- AbbVie Inc. (ABBV)
Health Care Stock #7: 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 has generated very impressive growth over the past few years.
Source: Investor Presentation
UnitedHealth’s market capitalization is $212 billion and it produces $244 billion in annual revenue. UnitedHealth posted strong first-quarter Revenue increased 9% to $60.3 billion as the UnitedHealth care business saw its top line expand 7.6% to $48.9 billion, while the Optum business’ revenue rose 11.7% to $26.4 billion.
From a revenue stream perspective, premiums rose 7.8% ($47.5 billion), products rose 20.4% ($8.1 billion), and services increased 5.2% ($4.3 billion). Earnings rose 22.4% on a dollar basis and 22.7% on an adjusted per-share basis to $3.73. Adjusted earnings-per-share guidance for 2019 was updated from $14.40 to a range of $14.50 to $14.75.
UnitedHealth will be able to produce growth through additional policies written, higher prices, as well as investments in new growth areas. UnitedHealth recently acquired payments firm Equian for $3.2 billion. The acquisition will boost UnitedHealth’s Optum health services segment.
UnitedHealth’s price-to-earnings multiple has moved significantly lower in recent months and today, stands at 16.7 based on expected EPS of $14.70 for 2019. The stock is trading well below our fair value estimate of 17.5. This rare undervaluation condition could drive an additional 0.9% in total annual returns for shareholders if the P/E ratio expands to the fair value estimate.
The stock has a current dividend yield of 1.8%, and with EPS growth estimates of 9% per year, total returns are expected to reach 11.7% per year through 2024.
Health Care Stock #6: Amgen (AMGN)
Amgen is a major U.S. pharmaceutical company. Amgen focuses on six therapeutic areas: cardiovascular disease, oncology, bone health, neuroscience, nephrology, and inflammation. The company generates nearly $23 billion in annual revenues and trades with a market capitalization of more than $110 billion.
Amgen reported first quarter financial results on 4/30/2019. The company earned $3.56 per share, topping consensus estimates by $0.08 and improving 2.6% year-over-year. Revenue was essentially flat at $5.6 billion.
Source: Earnings Slides
Enbrel, which treats rheumatoid arthritis and is Amgen’s top grossing product, had 4% sales growth in the quarter due to a slight increase in net selling price and changes in accounting estimates of sales deductions and product returns.
Enbrel had experienced declines the past several quarters due to biosimilar competition and we expect that this will continue in future quarters. Neulasta revenues decreased 12% due to lower net selling price. Amgen saw better success with some of its newer products.
Prolia, which treats osteoporosis and is the company’s third best-selling product, grew 20% on the strength of higher demand. Revenues for Repatha, which helps control cholesterol, increased 15% as higher demand was offset by net selling price.
Amgen cut the price of Repatha by 60% last year in order to help drive unit demand. Repatha should perform better once the price cut is lapped. The company has $2.1 billion remaining under its stock repurchase authorization, which will also help fuel EPS growth.
Amgen expects revenue in the range of $22 billion to $22.9 billion up from previous guidance of $21.8 billion to $22.9 billion. Amgen sees adjusted earnings-per-share in a range of $13.25 to $14.30 up from $13.10 to $14.10 previously. Achieving the midpoint for adjusted earnings would represent a 4.3% decrease from the prior year.
Amgen stock trades for a 2019 price-to-earnings ratio of 13.1. The ten-year average price-to-earnings multiple is 12.9, which we see as fair value. Shareholders could see a slight reduction to annual returns if the stock returns to our target valuation by 2024.
Still, 9% expected annual EPS growth plus the 3.2% dividend yield lead to total expected returns near 12% per year over the next five years.
Health Care Stock #5: Sanofi SA (SNY)
Sanofi is an internationally-based health care manufacturer. The company develops and markets a variety of therapeutic treatments and vaccines. Pharmaceuticals account for ~72% of sales, vaccines makeup ~15% of sales and consumer healthcare contributing the remainder of sales.
Sanofi is truly a global leader, with a third of sales coming from the U.S., a little more than a quarter coming from Western Europe, and the remainder of sales coming from emerging markets/rest of the world.
Sanofi is incorporated in France, but U.S. investors have access to the company through an American Depositary Receipt, or ADR. The stock has a market capitalization of $108 billion in the United States.
Sanofi released financial results for the first quarter on 4/26/2019. Revenue improved 4.2% for the quarter, or 3.9% adjusted sales growth in constant currency. The company earned $1.58 per ADR share during the quarter, which was $0.12 above estimates.
Source: Earnings Slides
The pharmaceutical segment grew 3.1% primarily due to a 31% increase in specialty care products. Within this group, rare disease sales increased 10.1% while immunology grew 186%. These gains were offset by a 6.9% decline in diabetes and a 9.3% drop in generic drugs.
Dupixent, which was approved in the third quarter of last year for treatment in the U.S. for patients with moderate-to-severe asthma, had revenue growth of 187% for the quarter. Growth for this drug should be strong going forward. The product gained approval for asthma in Japan and is now available in nearly 20 countries.
In the rare disease franchise, sales for Myozyme/Lumizyme, which treats Pompe disease, grew almost 11%, while vaccines grew 20.1% during the quarter due primarily to growth in Polio/Pertussis/Hib vaccines. We expect Sanofi to earn $3.32 per ADR share in 2019, which would be an increase of 4.1% from the previous year.
Sanofi has historically relied upon a combination of organic investment and acquisitions to produce growth. The company paid $11.6 billion for Bioverativ, which closed in March of this year, and $4.8 billion for Ablynx, which closed in June of this year. These purchases have given Sanofi access to the markets for rare blood disorders, one of the higher growth markets in pharmaceuticals. These acquisitions also give the company a large presence in emerging markets, as well as new diabetes and skin cancer drugs.
Sanofi shares trade for a 2019 P/E ratio of 13.2, while we maintain our 2024 target price-to-earnings ratio of 16, which is in line with peers. If the stock expanded to its historical average, investors would see an additional 3.9% in annual returns through 2024. The stock’s 4.2% yield is more than double the yield of the S&P 500.
Lastly, we expect 4% annual EPS growth through 2024, leading to total expected returns slightly above 12% per year over the next five years.
Health Care Stock #4: 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 $220+ billion in annual revenue and trades with a $25 billion market capitalization.
McKesson reported mixed financial results for the recent full-fiscal year. The company continues to be challenged by changing industry dynamics, but McKesson advanced on multiple key priorities in the most recent fiscal year.
Source: Earnings Slides
Revenue for the fourth quarter came in at $52.4 billion, a 2% increase over the comparable period last year. Adjusting for currency fluctuations, the revenue gain would have been 3%. For the full year, revenue was also up 3%.
The company’s U.S. pharmaceutical business saw revenue increase 3% in Q4 thanks to strong market growth that was offset – once again – by increased generic adoption. The segment posted a 3% gain for the full fiscal year.
The European pharmaceutical business saw revenue decline 6% on a reported basis in Q4, but this was due to a 2% organic revenue gain that was more than offset by a sizable 8% currency translation headwind. Full-year revenue was flat on a reported basis and +1% adjusted for currency.
The company’s medical-surgical segment saw revenue climb 13% in Q4, although this business is a small fraction of total revenue. The full-year revenue gain for medical-surgical was 15%.
Earnings-per-share increased 6% to $3.69 on an adjusted basis in Q4, and rose 8% to $13.57 for the fiscal year. McKesson came out with guidance for fiscal 2020 of EPS in a range of $13.85 to $14.45.
The stock’s price-to-earnings ratio has ebbed and flowed in the past decade but today, it is quite cheap relative to its historical norm at 9.8. We see fair value as 13 times earnings and thus, McKesson offers a strong value to prospective shareholders. That could provide a robust 5.8% tailwind to total returns over the next five years as the stock’s valuation reverts to more normalized levels.
In addition to expected EPS growth of 7% per year and the 1.1% dividend yield, McKesson’s five-year returns are expected to reach 13.9% per year through 2024.
Health Care Stock #3: Cardinal Health (CAH)
Like McKesson, Cardinal Health is a health care distributor. It has increased its dividend each year for over 30 consecutive years, making it a Dividend Aristocrat. Cardinal Health serves over 24,000 United States pharmacies and more than 85% of the country’s hospitals.
On May 9th, 2019 Cardinal Health released Q3 fiscal year 2019 results for the period ending March 31st, 2019. For the quarter Cardinal Health reported revenue of $35.2 billion, representing a 4.8% increase compared to the $33.6 billion posted in Q3 fiscal year 2018. On the bottom-line adjusted earnings-per-share totaled $1.59 versus $1.39 in the year ago period.
The core pharmaceutical segment generated 6% revenue growth, but profits fell due to falling margins.
Source: Earnings Slides
Cardinal Health operates in two segments: pharmaceutical and medical. The pharmaceutical segment makes up the lion’s share of revenues (~89%), but the medical segment remains important due to its higher margins and growth potential.
The pharmaceutical segment reported profit of $536 million (a 10% year-over-year decline) on $31.4 billion in revenue in the most recent quarter. The medical segment generated $155 million in profit (a 22% year-over-year decline) on $3.9 billion in revenue.
Cardinal Health also provided an updated fiscal year 2019 outlook. The company raised its adjusted earnings-per-share guidance for the year to $5.02 to $5.17 (from $4.97 to $5.17 previously). In addition, the company announced a 1% dividend increase to $0.4811 per quarter and extended its distribution agreements with CVS through 2023.
The environment for Cardinal Health remains challenged, due to generic pressure and the threat of Amazon disrupting the pharmaceutical distribution industry. But we maintain a positive long-term view of Cardinal Health, thanks largely to its entrenched business model. We expect positive EPS growth of 5% each year over the next five years.
Cardinal Health has traded hands with an average P/E ratio of about 14 or 15 times earnings dating back to 2010. However, this was during a time when growth was much more robust. We have used a multiple of 12 times earnings as a starting place for fair value in recognition of our lower anticipated growth rate. Even so, it appears that there is ample valuation improvement potential from this point.
With a current P/E of 9.3, expansion of the P/E ratio to our fair value estimate could fuel 5.2% annual returns. In addition, expected EPS growth of 5% and the dividend yield of 4.1% lead to total expected returns of 14.3% per year for the stock.
Health Care Stock #2: CVS Health (CVS)
CVS Health is an integrated healthcare services provider that operates a pharmaceutical services business, along with the country’s largest chain of pharmacies. The company operates more than 9,700 retail locations, 1,100 medical clinics, and services more than 90 million plan members. CVS has a market capitalization of $74 billion and generates annual revenues of $250 billion.
On November 11th, 2018, CVS Health Corporation completed its acquisition of Aetna. The company expects $300 to $350 million in cost synergies this year with a total goal of $750 million in 2020.
CVS Health Corporation reported financial results for the first quarter on May 1st. The company’s adjusted earnings-per-share was $1.62 for the quarter, topping estimates by $0.11 and improving 9.5% from the prior year. Revenue grew 35% to $61.7 billion, which was $1.3 billion above expectations.
Source: Earnings Presentation
Excluding Aetna, revenues still grew more than 3% thanks largely to the retail pharmacy segment. The Pharmacy services segment grew revenues 3.1% to $33.6 billion due to brand name drug price inflation and an increase in claims volumes, which were partially offset by pricing pressure and a higher generic dispensing rate.
Revenues for the Retail Pharmacy division improved 3.3% to $21.1 billion. Pharmacy prescriptions volumes increased 6.7% in part because of CVS Health Corporation’s preferred status in several Medicare Part D networks.
The company’s Health Care Benefits segment, which is the equivalent to the former Aetna Health Care division, generated nearly $18 billion in revenues and has nearly 23 million members. This division gained more than 700K members from Q4 2018.
CVS Health Corporation increased its adjusted earnings-per-share guidance to $6.75 to $6.90 from $6.68 to $6.88. The new midpoint for guidance represents a decline of 2.8% from results for 2018. The primary reason for the decline in earnings is due to the intergradation costs of Aetna.
Based on EPS of $6.83 expected for 2019, CVS stock has a P/E ratio of 8.0, significantly below our fair value estimate of 11. Expansion of the P/E ratio could fuel annual returns of 6.6% per year over the next five years. In addition, expected annual EPS growth of 5% plus the 3.7% dividend yield lead to total expected returns above 15% per year through 2024.
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. AbbVie was spun off by Abbott Laboratories in 2013. Today, AbbVie generates annual revenue in excess of $32 billion and the stock trades with a market capitalization of ~$100 billion.
AbbVie’s most important product by far is Humira, which by itself represents ~60% 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. In late April, AbbVie reported (4/25/19) its 2019 first-quarter earnings results. Revenue of $7.8 billion increased 0.4% on an operational basis (excluding currency).
Humira dragged AbbVie down last quarter, with a 5.6% overall sales decline. Sales of Humira in the international markets declined 23% on an operational basis last quarter, which reflects the impact of biosimilar competition abroad. Domestic growth helped offset this, as U.S. sales of Humira increased 7.1% last quarter. However, Humira will face biosimilar competition in the U.S. in 2023, which is why AbbVie investors remain concerned.
Fortunately, AbbVie’s revenues were positively impacted by strong growth from other products last quarter. Imbruvica grossed sales of $1.02 billion, up 34% from the same quarter last year. In all, AbbVie’s hematologic oncology portfolio grew revenue by 43% last quarter. This helped AbbVie grow its adjusted earnings-per-share by 14% for the quarter, to $2.14.
AbbVie’s growth will be significantly boosted by the $63 billion 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 nearly $50 billion, based on 2018 results.
Source: Investor Presentation
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%.
AbbVie expects adjusted earnings-per-share of $8.78 at the midpoint of guidance, and currently has 1.483 billion diluted shares outstanding, which implies company-wide net income of $13.0 billion in the full fiscal year.
Meanwhile, Allergan expects adjusted earnings-per-share of $16.55 and an average 2019 share count of 332.0 million. This implies company-wide adjusted net income of $5.5 billion.
The combined company should be capable of generated $18.5 billion of adjusted net income (AbbVie’s $13.0 billion plus Allergan’s $5.5 billion) in the current fiscal year. AbbVie is issuing 0.8660 AbbVie shares per Allergan share and there are approximately 332 million Allergan shares outstanding, so the merger will create 294 million new AbbVie shares.
AbbVie had 1.483 billion diluted shares outstanding at the time of its latest earnings release, so the new share count would be 1.777 billion.
Dividing the pro-forma company’s adjusted net income of $18.5 billion by its estimated share count of 1.777 billion, reveals adjusted earnings-per-share of $10.41.
Since this is significantly higher than AbbVie’s 2019 financial guidance of $8.78 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. Based on expected earnings-per-share of ~$8.78 for 2019, AbbVie stock trades for a price-to-earnings ratio of 8.1.
We believe AbbVie deserves a P/E ratio of at least 13, which represents our fair value estimate for the stock. An expanding P/E multiple to our fair value estimate of 13 would boost shareholder returns by approximately 9.9% per year over the next five years.
Lastly, the stock has a current dividend yield of 6.0%, 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. We believe AbbVie’s dividend is highly secure, as discussed in greater detail in the video below.
With a low payout ratio and future growth catalysts, we believe AbbVie’s dividend is secure. With expected EPS growth of 9.5% through 2024, AbbVie’s total expected returns exceed 25% per year over the next five years, making it our top health care stock today.