I added a company from the Healthcare sector in my Sharebuilder purchase this week as the sector is a little underweight in my Portfolio. Here’s a summary of the stocks in my watchlist and what I decided to purchase.
The Healthcare sector contains drug companies, health insurance companies, medical equipment and long-term care companies. If there’s one thing certain in addition to death and taxes, it’s that people will always need health care. Morningstar shows Healthcare as the second highest performing sector year to date, only beaten by the Real Estate sector.
My healthcare dividend stocks
I currently own positions in JNJ, PFE & Halyard Health (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.
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 FCF Payout Ratio is currently 53%, a value which has held steady since 2011 along with an average of 51% over the last 5 years. Current dividend yield is 2.9% based on a $0.70 quarterly dividend per share with an annualized 5-year dividend growth of 7.4%.
Its P/E of 17.5 is lower than the S&P 500’s average of 19.5. 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%.
JNJ has excellent credit at Moody’s with an Aaa rating.
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 5 years, having cut them in 2010. It has a dividend yield of 3.1% with a FCF payout ratio of 43%. Over the last 5 years, the FCF P/O ratio has averaged 44% and remained largely flat. The dividend has increased at a 5-year annual growth rate of 5.4%.
PFE has a current P/E of 23.9, exceeding the S&P’s average of 19.5. 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 EPS growth over the next 5 years is estimated at 2.2%.
PFE has a good credit rating at Moody’s with an A1 rating.
Choosing new stocks to consider
Since I only own two stocks in the healthcare sector, I’m open to add a position in a new company. My starting point is an initial screening of the US Dividends Champion List 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 >= 2.25%
- 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
Only three companies meet the above criteria and I already own two of them (PFE and JNJ). The third company was Teva Pharmaceutical Industries (TEVA), an Israeli company which looks interesting with an 18 year growth history. I didn’t have time this week to look into this company or the tax implications of this ADR however so I didn’t consider it for purchase.
The following companies remain on my watchlist but most have too low dividend yields for me to consider at this time. Of these Owens & Minor and Baxter International have good dividend yields at 3%.
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% so just below my threshold but I’ll continue to monitor them as they’re in a different health sector than the drug companies I own.
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 3% that has grown at an annual rate of 10% over the last 5 years. It lost money last year with negative earnings and its Payout Ratio on a P/E basis is 95%. Along with only average credit ratings from Moodys, I’m not interested.
Baxter International (BAX)
Baxter International (BAX) is a $36B 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 later this year.
BAX has an 8-year dividend growth history with a 3% yield from a quarterly dividend of $0.52.
United Healthcare (UNH)
United Healthcare (UNH) have a 5 year dividend growth history, however their low dividend yield of 1.5% means I’m going to pass.
Bristol-Myers Squibb (MBY)
BMY remains on my watchlist however I’m not inclined to add a position because I already hold two drug companies. It offers a 2.2% dividend and a high FCF Payout Ratio of 91% so I view it as more constrained for future dividend growth than PFE.
What to buy?
This was quite a simple determination for once as only two stocks made it through to be considered: JNJ and PFE.
Both have a good dividend yield and meet my criteria requiring a 3% dividend growth rate. Likewise, both have great credit ratings. Despite a higher payout ratio, JNJ has a longer dividend growth history – more than 10 times longer in fact!
PFE also contributes 5.5% of my projected annual dividends which is above my 5% limit, so I went with purchasing JNJ this week.
Here’s the outcome visually.
My purchases this week
So my Sharebuilder purchase on Tuesday earlier this week was:
- 3.0092 shares of JNJ @ $99.694 ($300)
This purchase should increase my projected yearly dividend income by about $8.
Full disclosure: I am long PFE, HYH & JNJ.
Quote of the day
It is health that is real wealth and not pieces of gold and silver.