It has been a tough stretch for health-care stocks in 2019, and there is a good chance it isn’t over yet.
Sen. Bernie Sanders of Vermont is one of several Democratic presidential candidates pushing for Medicare for All. With the 2020 presidential election still 18 months away, the direction of health-care policy is likely to remain unsettled for a while, likely leaving stocks in the sector under pressure.
“Political and legal rhetoric around the Affordable Care Act and ‘Medicare for all’ can be expected to fuel continued volatility” in the sector, Brad Sorensen, managing director for market and sector analysis at the Schwab Center for Financial Research, recently wrote.
Health-care stocks in the S&P 500 (.SPX) have returned about 3% this year, by far the worst performer among the 11 sectors in the benchmark index. The S&P 500 has returned about 18%.
For income investors, though, health-care stocks can be a good place to look, recent underperformance notwithstanding. “In general, health-care companies’ balance sheets are solid, their stocks have offered attractive dividend yields and the sector’s overall cost structure appears to have improved,” adds Sorsensen.
For this week’s column, Barron’s looked for a few health-care stocks with growing dividends, reasonable balance sheets in terms of debt levels, and a stock price at least 10% off its 52-week high.
Three companies that met those criteria are listed in the accompanying table.
Medical-device maker Medtronic (MDT), which yields 2.3%, has a one-year return of 11.5%. It is expected to earn $5.15 a share in its most recent fiscal year, which ended in April, compared with $4.77 in the previous fiscal year. Revenue growth has been challenging, but the company does generate a lot of free cash flow that it can return to shareholders.
Medtronic is making a big push into surgical robotics as more patients opt for minimally invasive therapies, as opposed to traditional open surgeries. The company plans to launch more than 90 products over the next five years in its minimally invasive therapies group, including surgical robotics, according to Cowen Equity Research.
UnitedHealth Group (UNH), a large managed-care outfit, offers something of a trade-off to investors: a lower yield in exchange for higher dividend growth. It currently yields 1.5%, well below the average of about 2% for the S&P 500.
However, the company has regularly declared double-digit increases, a testament to its strong free cash flow. Last June, UnitedHealth raised its annual dividend to $3.60 a share, a 20% boost, It raised its disbursement by the same percentage in 2017, too.
Quest Diagnostics (DGX) yields 2.2%. The company provides medical tests for a long list of medical conditions, including lung cancer, allergies, and hepatitis C. Last month it was named a preferred labor provider for UnitedHealth.
“We see continued volume growth improvement, driven by market share gains resulting from increased network access,” including the UNH network, Jefferies said in a recent research note.
The consensus estimate for Quest’s 2019 profits is $6.47 a share, up from $6.31 in 2018, according to FactSet. It currently pays an annual dividend of $2.12 cents a share, having raised it by 6% late last year.
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