Recent Healthcare stock purchase

Last week I added to my position in the Healthcare sector. This sector is underweight in my portfolio and I decided to buy into a new company to round the sector out.

Around 10% of my total annual dividend income from stocks comes from the Healthcare sector at the moment; I want that value to be nearer 11% per my dividend portfolio sector allocation.

The Healthcare sector

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 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 won’t be adding to it.

Johnson & Johnson (JNJ)

Johnson & Johnson (JNJ) is a $273B diversified healthcare company that operates in three segments: Pharmaceutical, Medical Devices & Diagnostics and Consumer.

JNJ is one of the top 20 dividend champions with a 53-year dividend growth history. Its Payout Ratio is currently 53%, a value which has held reasonably steady since 2011 with an average of 51% over the last 5 years. Current dividend yield is 3% based on a $0.75 quarterly dividend per share. The company has increased its dividend with an annualized 5-year dividend growth of 7.4%.

Its P/E of 17.6 is lower than the S&P 500’s average of 19.4. 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 5.1%.

Free Cash Flow has been positive for each of the last ten years with a low of $9.25B in FY2005 and a high of $14.756B in FY2014. TTM Free Cash Flow is $13.8B.

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

The company pays 4.9% of my annual dividend payments.

Pfizer (PFE)

Pfizer (PFE) is one of the world’s largest pharmaceutical companies with a market cap of $207B.

PFE has increased its dividends yearly for the last 5 years, having cut them in 2010. It has a dividend yield of 3.3% with a payout ratio of 77%. Over the last 5 years, the P/O ratio has been within a 60-70% range so the current value indicates an increase to this trend. Payout ratio based on a Free Cash Flow basis is lower at 50%. The dividend has increased at a 5-year annual growth rate of 5.4%.

PFE has a current P/E of 23.4, exceeding the S&P’s average of 19.4. 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 3.2%.

Free Cash Flow has been positive for each of the last ten years with a low of $9.9B in FY2010 and a high of $18.5B in FY2011. TTM Free Cash Flow is $13.1B.

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

The company pays 5% of my annual dividend income.

National Healthcare (NHC)

National Healthcare (NHC) is a $920M company operating healthcare clinics and long-term care centers in the US. As of the end of 2014, it leased or owned 74 nursing facilities, 18 assisted living centers, and five independent living centers.

The company has increased its dividend for 12 years since it started paying dividends in 2004. Its payout ratio is 43% with a forward dividend yield of 2.47% from its dividend per share of $0.40. The payout ratio has been quite stable over the last ten years, staying within a 25% to 45% range. The last 5 years’ annualized dividend growth from 2009 to 2014 is 5.7%.

Its P/E of 20.6 is higher than the S&P 500 average of 19.4. For the most part of the last ten years, the P/E has been fairly close to the S&P average with an exception in 2008 where its valuation was almost double that of the index. Currently this year the P/E has increased slightly compared to last year’s 20.1. NHC doesn’t have much analyst coverage and a 5-year EPS growth estimate isn’t available.

NHC’s cash flow is $28M over the last twelve months. It has positive cash flow for all but one of the last ten years with -$2M in 2006. On a free cash flow basis, its payout ratio is nearer 100% with most of its cash going towards dividend payments after capital expenses have been paid.

NHC doesn’t have a credit rating at Moodys. The company was also rated as one of America’s 100 most trusted companies by Forbes magazine last year.

What to buy?

Both of my positions in JNJ and PFE are at the limit of my 5% income rule – I don’t want to be too dependent on either company in case of cut or held dividends and 5% is my upper limit.

Between JNJ and PFE, I have most exposure to the drug / pharmaceutical industry although JNJ has some diversification into consumer products and medical devices. In adding a new position I wanted to stay away from the drug industry and look for a different industry.

NHC caught my eye as it operates nursing and long-term healthcare facilities which will always be needed and likely fully populated. It’s invested in building several new facilities which will add 212 new beds in 2015 with another 438 beds opening in 2016.

My Healthcare stock purchase

My purchase last week was

  • 11 shares of NHC @ $64.80 ($750)

This purchase should increase my projected yearly dividend income by $18.75.

 

Quote of the day

Nothing can stop the man with the right mental attitude from achieving his goal; nothing on earth can help the man with the wrong mental attitude.

0 thoughts on “Recent Healthcare stock purchase”

  1. I think that is a good buy, DL. Obviously all three look attractive for the long-term. But if you’re already heavy in Pfizer and J&J then National Healthcare looks a good alternative.

    I have been trying to bulk up my healthcare exposure recently. Two areas I am still looking to aim for are medical device manufacturers and healthcare-related property (like NHC). In the UK–chiefly due to the NHS–this is less of a massive industry. However, some primary care facility companies exist which are attractive in principle if not yet in their fundamentals!

    Looking good!

  2. Also take a look at MDT and BDX for larger names. There’s also OMI which is a smaller company. I’m looking really hard at adding to my JNJ position. I know it’s not optimal because it’ll push its portfolio and dividend weight higher than I’d like but with a company like JNJ I don’t mind pushing the envelope a bit. Truly outstanding company. There’s also BAX which I want to take a closer look at again now that the spinoff of BXLT is complete. I’m pretty much topped up on health care REITs, at least for the time being.

  3. Thanks for sharing. Both PFE and JNJ are on my long term watch list. need to read up more NHC. Nice to know of other healthcare stocks others are buying.
    D4s

  4. Love the health sector long term. For now my focus seems to be among the health REITs though I do like JNJ, BDX, BCR, ABT, ABBV long term. Thanks for sharing.

  5. Have to admit that I don’t have NHC on my radar but I do love a stock that has provided its shareholder with 12 consecutive years of dividend increases! And it still has a nice low payout ratio in the low 40s so the increases should continue.

    Thanks for sharing your recent buys. Best wishes! AFFJ

  6. Loving all of these purchases. As the population age, health care sector is going to be more and more important. This is a sector we wish to increase our allocation moving forward.

  7. I know less about NHC than the others, but can’t go wrong with healthcare. One reason why I like JNJ so much though is because it’s also active in other sectors (also sells consumer products). I think that kind of merging is perfect for growth investors.

    Cheers,

    Mike

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