The S&P 500 (.SPX) has had a strong start in 2019, having returned about 9%. But the health-care stocks in that index have been more subdued, returning about 4.5%.
The sector, however, can be fertile for income investors, as some of these companies return a lot of capital to shareholders via share buybacks and dividends. Pharmaceutical firms such as Pfizer (PFE) and Merck (MRK), for example, yield 3.4% and 2.8%, respectively.
Since sectors such as consumer staples and utilities are often associated with income, health care at times can be overlooked.
For this article, we eschewed pharmaceutical and biotech stocks, which we’ve written about before, and looked elsewhere across the health-care stocks in the S&P 500.
We sought stocks that yield at least 2% and look solid financially. That starts with having a free cash flow yield that exceeds the dividend yield.
The pickings were fairly slim, but the accompanying table shows four stocks that met these criteria: Medtronic (MDT), CVS Health (CVS), Quest Diagnostics (DGX), and Cardinal Health (CAH).
Although the companies’ yields are all above the S&P 500’s average of 2.06%, each has a different underlying story. Of these four outfits, only one, Medtronic, has had a positive stock return over the past 12 months. But all of them appear to have sufficient cash flow to maintain their dividends.
CVS Health, which acquired health insurer Aetna in late 2017 in a deal valued at about $70 billion, yields an attractive 3%.
But investors need to keep in mind that CVS hasn’t announced a dividend hike since late 2016. The company’s share buybacks and dividend increases have been suspended “until we achieve a leverage ratio” that is lower, Eva Boratto, now the company’s chief financial officer, told analysts late last year.
The stock has a one-year return of minus 8%, partly reflecting the challenges of bringing two very different companies together under one roof.
Analysts expect the company to earn $7.35 a share this year, up from $7.00 in 2018, according to FactSet.