The Healthcare sector is the lowest weighted sector in my my dividend stock Portfolio this week. I own two healthcare dividend stocks (PFE & JNJ) and my last healthcare purchase added to my position in PFE in June this year. I’ve picked some other stocks from the Dividends Champion List that caught my eye to see how they compare and if starting a new position to diversify further is worthwhile.
Here’s my portfolio as of 24-August grouped by market sector. Healthcare is the lowest sector this week followed by the Utilities and Consumer Cyclical sectors. AT 8.9% healthcare is outside my +/- 10% of average value rule.
My healthcare dividend stocks
I currently positions in JNJ & PFE in the Healthcare sector.
Johnson & Johnson (JNJ)
Johnson & Johnson (JNJ) is a $290B healthcare company that is diversified company operating in three segments: Pharmaceutical, Medical Devices & Diagnostics and Consumer.
JNJ is one of the top 20 dividend champions with a 52 year history. Its TTM payout ratio is 49.5, and overall the Payout Ratio has been declining from its peak of 64.6 reached in 2011. Current dividend yield is 2.7% with an annualized 5 year dividend growth of 7.4%.
Its P/E of 19 is lower than the industry average of 21.9 but higher than the S&P 500 average of 18.2. With exceptions in 2009 and 2010, its P/E ratio has generally been higher than the S&P average but the P/E has held steady at 19 since 2013. 5 year estimated EPS growth is 7%.
Pfizer (PFE) is one of the world’s largest pharmaceutical companies with a market cap of $183B.
PFE has increased its dividends yearly for the last 4 years, having cut them in 2010. It has a dividend yield of 3.6% with a TTM payout ratio of 63%. Over the last 5 years, the P/O ratio has averaged 67% so it’s just a little lower at present. The dividend has increased at a 5 year annual growth rate of 5.4%.
PFE has a current P/E of 18.2, matching the S&P’s average of 18.2 and beating the industry average of 21.9. Its P/E value has held steady since 2013. Except for 2009, PFE has always had a higher P/E than the S&P average since 2005. 5 year EPS growth is estimated at 3.1%.
Choosing new stocks to consider
My initial screening of the Dividends Champion List is as follows:
- Include only stocks from Champions, Challengers and Contenders filtered by the sector I’m interested in
- Exclude any stock which has had negative growth in the last 1 or 5 years
- Exclude any stock which is projected to have negative growth in the next 5 years
- Include only stocks with a dividend yield above 2%
There were only 3 companies meeting the above criteria and one of them was JNJ that I already own. I’ve listed the other two below as well as adding NHC which bypassed the filter on account not having a growth estimate in the champion list.
The new contenders shortlist
I don’t own any of the following three companies; I included them to see how they compare to what I own and if they might be worthwhile purchases.
National Healthcare Corp (NHC)
National Healthcare Corp (NHC) is a small cap $813M company that operates more than 130 long-term health care centers, homecare programs and independent / assisted living communities in 11 states.
It’s a dividend contender, having increased dividends for 11 years. The current dividend yield is 2.3% with a good 37% TTM Payout Ratio that has been in the 30-40% range for the last 6 years. The annualized dividend growth over the last 5 years has been 5.6%.
The company has a P/E of 16.5 which compares well with the S&P’s average of 18.2. The P/E has been generally been lower than the S&P’s average each year except for 2006, 2008 and 2012. I couldn’t find an estimated 5 year EPS growth on either FinViz, S&P Capital or Morningstar, so for this review I went with 5.6% which is the historical 5 year growth.
Owens & Minor (OMI)
Owens & Minor (OMI) is a $2B distributor of medical / surgical supplies to the healthcare industry. It reports in two operating segments; Domestic and International with 90% of its revenue coming from the Domestic segment.
OMI has increased its dividend payment for the last 17 years. It offers a current yield of 2.9% that has grown at an annual rate of 10% over the last 5 years. Its TTM payout ratio is 60%, a number which has been steadily increasing from 32% in 2008.
Its P/E ratio of 21.2 is above the industry average of 30.1 as well as the S&P’s 18.2. Since 2005, the P/E has been higher than the S&P average except for 2008 and it reached a high of 26 in 2006. Estimated 5 year EPS growth is 6%.
Baxter International (BAX)
Baxter International (BAX) is a $40B pharmaceutical company with a focus on treating blood and circulatory illnesses. It operates in two segments: BioScience and , Medical Products. The BioScience division will be spun-off into a standalone company next year.
BAX has an 8 year dividend growth history with a 2.7% yield. The dividend has grown at an annual rate of 15.6% over the last 5 years. Its payout ratio, while good, has been trending higher since 2011, with a current TTM value of 56. The average P/O over the last 5 years was 40%.
The P/E value is 21.1 which is lower than the industry average of 34.5 and higher than the S&P average of 18.2. Apart from a record P/value in 2004 where the P/E reached 55, BAX’s P/E has generally been higher than the S&P. The current level marks a higher difference than the S&P over the previous 3 years. Estimated EPS growth over the next 5 years is 8%.
For more information on Baxter see Dividend Mantra’s great review of BAX from June.
Abbott Labs (ABT)
Abbott Labs (ABT) is a former dividend champion with a 41 year track record of increasing dividends. However due to the AbbVie spin-off, it was removed from the Dividend Champion list at the end of 2012 and I expect to see it show up again in a few more years.
United Healthcare (UNH)
United Healthcare (UNH) is also on my watchlist, however they don’t qualify for this roundup due to their dividend yield which is less than 2%.
Vanguard Healthcare ETF (VHT)
Because of the smaller selection of dividend champions in the healthcare sector, I am considering to purchase shares in the Vanguard Healthcare ETF (VHT). This has a low expense ratio of 0.14% and can be bought commission-free. It contains 311 stocks from the healthcare sector, although its distribution is around 1.3%. The annual distribution and low yield are the main factors stopping me here.
What to buy?
Looking at all 5 choices, my criteria of requiring a 5 year dividend growth history eliminates my current holdings in PFE from the start. PFE lowered dividends in 2009 but has been increasing them ever since so it should appear on the dividend champion list soon as a Challenger.
The remaining 4 companies all have suitable dividend yield and meet my criteria requiring a 3% dividend growth rate. Dividend yield between the 4 companies ranges from 2.3 to 2.9 with OMI being the most generous.
NHC scores the lowest of the 4 due to its lower yield, smaller size and inconsistent dividend schedule. It gained points for having the lowest payout ratio of all 4 companies.
BAX is in third place, having higher growth and a reasonable current yield; however its score is lowered by a shorter dividend growth history as well as an inconsistent dividend schedule.
OMI is in second place, helped by a longer dividend growth history, higher current yield and a stable dividend payment schedule. It loses some points due to its smaller market cap.
In first place, then its JNJ with a 52 year dividend growth history that outclasses the other companies in this roundup. In addition it has a reasonable payout ratio that’s the second lowest of the 5 companies, and a solid dividend increase schedule.
So I’ve decided to buy more JNJ this week. I would lean towards a non-pharmaceutical company for any additional purchases in this sector, but I’m not convinced of either OMI or NHC to purchase either right now.
Here’s the outcome visually.
My purchases this week
So total purchases this week will be:
- $424 Individual Stocks (JNJ)
This purchase should increase my yearly dividend income by about $11.
Full disclosure: I am long PFE & JNJ.
Quote of the day
Be careful about reading health books. You may die of a misprint.