Healthcare Dividend Stocks – my last purchase in 2014

I somehow managed to mess up my Sharebuilder purchase last week and ended up not buying anything. Luckily, there are 5 Tuesdays this month so I have a second chance to get it right before the year-end. I’m looking at the Healthcare sector this week as it’s the lowest sector in my dividend stock Portfolio. I own three healthcare dividend stocks (PFE, JNJ and HYH), so here is a roundup of some interesting dividend paying stocks as well as my purchase decision.

At 8.9% the healthcare sector is outside my +/- 10% of average value rule, so I’m going to add to this sector. My last purchase was back in August, so this sector has been performing quite well in general and Morningstar shows Healthcare as the highest performing sector year to date, beating the Technology, Real Estate and Utilities sectors.

My Dividend Stock portfolio as of 28-Dec-14 showing Healthcare as the lowest sector by weight, then Consumer Cyclical and Basic Materials.
My Dividend Stock portfolio as of 28-Dec-14 showing Healthcare as the lowest sector by weight, then Consumer Cyclical and Basic Materials.

My healthcare dividend stocks

I currently own positions in JNJ, PFE & HYH in the Healthcare sector, although my HYH position (acquired when the company was spun off from KMB) is tiny (less than $40) and it’s a non-dividend paying stock so I’m going to ignore it for the purposes of this article.

Johnson & Johnson (JNJ)

Johnson & Johnson (JNJ) is a $294B 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 dividend growth history. Its payout ratio is currently 45.7, and the Payout Ratio has been declining each year since reaching a peak of 64.6 in 2011. Current dividend yield is 2.7% based on a $0.70 quarterly dividend per share with an annualized 5-year dividend growth of 7.4%.

Its P/E of 17.3 is lower than the industry average of 23 and the S&P 500’s average of 18.7. With exceptions in 2009 and 2010, its P/E ratio has generally been higher than the S&P average and the current value marks a lower than normal level. 5 year estimated EPS growth is 6.5%, down 0.5% from August.

JNJ has excellent credit at Moody’s with an Aaa rating.

Pfizer (PFE)

Pfizer (PFE) is one of the world’s largest pharmaceutical companies with a market cap of $199B.
PFE has increased its dividends yearly for the last 4 years, having cut them in 2010. It has a dividend yield of 3.3% with a TTM payout ratio of 64%. 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 7.4%.

PFE has a current P/E of 19.4, exceeding the S&P’s average of 18.7 and higher than the industry average of 23. Except for 2009, PFE has always had a higher P/E than the S&P average since 2005 so this year is no exception. The 5-year EPS growth is estimated at 1.4%, down 1.7% since August.

PFE has a good credit rating at Moody’s with an A1 rating.

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
  • Include only stocks with a dividend yield above 2%
  • Exclude any stock which has had negative EPS growth over the last 5 years
  • Exclude any stock which is projected to have negative growth in the next 5 years
  • Exclude ADRs

There are three companies meeting the above criteria and one of them was JNJ that I already own. I’ve listed the other two below and added NHC which bypassed the filter on account not having a growth estimate in the Champion List.

National Healthcare Corp (NHC)

National Healthcare Corp (NHC) is a small cap $900M company that operates more than 130 long-term health care centers, homecare programs and independent / assisted living communities in 11 states.

NHC is a dividend Contender, having increased dividends for 11 years. The current dividend yield is 2.1% with a 40% Payout Ratio that has been in the 30-45% 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 19.4, which is higher than the S&P’s average of 18.7. The P/E has been generally been lower than the S&P’s average each year except for 2006, 2008 and 2012. Because this is a smaller company it doesn’t have as good analyst coverage and I couldn’t find an estimated 5 year EPS growth, so for this review I went with 4.85% which is half of the previous 5-year’s EPS growth.

HNC is Not-Rated by Moody’s and has very little long-term debt with a Debt/Equity ratio of 0.1.

Owens & Minor (OMI)

Owens & Minor (OMI) is a $2.2B 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 2.8% that has grown at an annual rate of 10% over the last 5 years. Its payout ratio is 78%, a number which has been steadily increasing from 32% in 2008.

Its P/E ratio of 27.6 is above the industry average of 33.4 as well as the S&P’s 18.7. Since 2005, the P/E has been higher than the S&P average each year except for 2009 and it reached a high of 26 in 2006. Estimated 5-year EPS growth is 5.6%, down 0.4% since August.

OMI have only average credit standings at Moody’s with a Ba1 grade.

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 named Baxalta in 2015.
BAX has an 8-year dividend growth history with a 2.8% yield from a quarterly dividend of $0.52.

The dividend has grown at an annual rate of 15.9% over the last 5 years. Its payout ratio, while good, has been trending higher since 2011, with a current TTM value of 59. The average P/O over the last 5 years was 40%.

The P/E value is 21.8, which is lower than the industry average of 31.0 and higher than the S&P average of 18.7. Apart from a record P/E 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 6.2, down from 8% in August.

BAX have good credit standings at Moody’s with an A3 grade.

Honorable mentions

Abbott Labs (ABT)

Abbott Labs (ABT) is a former dividend champion with a 41-year record of increasing dividends. However due to the AbbVie spin-off, it was removed from the Dividend Champion list at the end of 2012.

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%.

Bristol-Myers Squibb (MBY)

BMY didn’t pass my filter because it had negative EPS growth from 2009 until now although it remains on my watchlist. I’m less inclined to add a position because I already hold PFE and both stocks have fairly short dividend growth periods to date. It offers a 2.4% dividend but a high Payout Ratio of 88% so it could have trouble growing its dividend significantly.

UK Dividend Healthcare stocks

I’m planning a separate article about UK specific companies as this post is already getting quite long. But until then, I thought I’d wave the Union Jack just a little bit.

GlaxoSmithKline plc

GlaxoSmithKline plc was formed in 2000 from a merger between Glaxo Wellcome and SmithKline Beecham, and as well as being the largest UK pharmaceutical company with a market cap of £67B, it’s the 6th largest company on the London Stock Exchange. It’s available on the US exchanges as an ADR with the symbol GSK as well as using the same symbol GSK on the UK markets.

GSK operates in three segments: Pharmaceuticals (67%), Vaccines (13%) and Consumer Healthcare (20%). Some popular consumer brands it sells that even I recognize are Beechams, Aquafresh and Sensodyne. Well-known drugs it manufactures are Advair and Paxil. The company was involved in a criminal case regarding its promotion of drugs and agreed to pay $3B to settle the case in 2013 – the largest drug related settlement at the time.

It has a high dividend yield of 5.6% but also a high Payout Ratio of 90% and pays dividends quarterly which is unusual for a British company. It has a 9-year dividend growth history after having cut dividends in 2005 and has an annualized 10-year growth rate of 7%. In the US, the ADR shows only a 1-year increase due to currency rate changes.

GSK’s P/E ratio is 12.3 based on a price of 1,385p and an EPS of 112.5.

What to buy?

Looking at the five choices (PFE, JNJ, OMI, HNC and BAX), 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 back on the dividend champion list in 2015. PFE also contributes 6.7% of my total projected dividends and I want to reduce that number to below 5% so that’s another limiting factor in a purchase.

The remaining four companies all have suitable dividend yield and meet my criteria requiring a 3% dividend growth rate. Dividend yield between the four companies ranges from 2.3 to 2.9 with OMI being the most generous.

OMI fails the credit test, as its average credit rating is below the above-average limit that I want to see, so it’s eliminated on that basis.

NHC scores the lowest of the remaining three due to its lower yield, smaller size and inconsistent dividend schedule. It gained points for having the lowest payout ratio of the three.

BAX is in second place, having higher growth and an average yield; however, its score is lowered by a shorter dividend growth history as well as an inconsistent dividend schedule.

In first place, then it’s 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. Another factor against BAX is the pending spinoff of Baxalta – I don’t want to be stuck with another small position in a non-dividend stock.

Here’s the outcome visually.

Yield Div% #Yr DivGr5 EstGr5 Value Credit Score Status
JNJ 2.7 2.9 52 7.4 6.5 16 A+ 47 Buy
BAX 2.8 0 8 15.9 6.2 17 A- 30 Buy
NHC 2.1 0 11 5.6 4.9 12 NR 25 Buy
OMI 2.8 0 17 10.3 5.6 17 B 0 Hold
PFE 3.3 6.7 4 5.4 1.4 18 A- 0 Hold

My purchases this week

So planned purchases this week will be:

  • $300 Individual Stocks (JNJ)

This purchase should increase my projected yearly dividend income by about $8.

Full disclosure: I am long PFE, HYH & JNJ.

 

Quote of the day

Good health is not something we can buy. However, it can be an extremely valuable savings account.

0 thoughts on “Healthcare Dividend Stocks – my last purchase in 2014”

  1. Dividend Life,

    Great purchase, JNJ is a company I have had my eye on since its PE ratio has dipped slightly below the markets PE. You said the two words that sum the company up perfectly…Dividend Champion. If you have excess capital, you can’t ever go wrong throwing it at JNJ.

    I really like how you arrived at your decision. Identifying an industry, considering all companies from afar, and then zeroing in on the company that performs best in your metrics. The approach is unbiased and will help you ultimately find the best fit for your portfolio.

    Keep up the great work. Strong way to end 2014!

    Bert, one of the Dividend Diplomats

    1. Hi Bert,

      Thanks for your support! I like diversification and JNJ are a great example of that.

      I think I want to avoid pure drug companies in the long term, so I’m still on the lookout for long term dividend growth stocks in the healthcare industry that are more service / infrastructure related.

      Best wishes and have a great New Year!
      -DL

  2. Hi, DL,

    Looking forward for your post about UK healthcare holdings. I’m very interested in your opinion about GSK.

    Regarding to JNJ, some day in the future it will be part of my portfolio, Today I think it is a bit expensive… I’m waiting for it over 94$.

    Regards,
    CZD.

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