6 stocks with healthy dividends and solid returns

  • By Lawrence C. Strauss,
  • Barron's
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The healthcare sector can be a good place to find solid and growing dividends, thanks partly to how durable many of these companies are through thick and thin.

The need for healthcare doesn’t go away during a recession, after all.

For this screen, Barron’s started with the highest-yielding healthcare stocks in the S&P 500 index (). An additional requirement was that a company’s free-cash-flow yield exceeded its dividend yield. That suggests that a company can cover its dividend without having to borrow.

Free cash flow is basically the operating cash flow a company has left over, usually after capital expenditures. It can be used to pay dividends, repurchase shares, make acquisitions or pay down debt, among other uses.

A cash flow yield above the dividend yield suggests that a company has enough cash on hand for its dividend.

The other requirement for the screen was that a company raised its dividend in 2021 and 2020 over the previous year’s level. That’s another sign of financial strength, as plenty of U.S. companies, even large ones, had to cut or suspend their dividends early in the pandemic in 2020.

The top six qualifiers are AbbVie (), Gilead Sciences (), Cardinal Health (), Merck (), Bristol Myers Squibb (), and Amgen ()—all large-cap stocks.

A bonus for these companies is that as of Oct. 31, they have all notched double-digit returns this year, dividends included.

Pharmaceutical company AbbVie, which yields 3.9%, late last month declared a quarterly dividend of $1.48 a share, up about 5% from $1.41 a share. The company has grown its dividend by 270% on cumulative basis since its first quarterly disbursement of 40 cents a share in early 2013.

The company’s sales and profits have been largely driven by blockbuster drug Humira, whose applications include treading rheumatoid arthritis. That drug’s dominance is expected to lessen somewhat as new competitors emerge. But FactSet consensus analyst estimates show the dividend continuing to grow in the mid-single digits over the next few years as other products help pick up some of the slack.

Biopharmaceutical company Gilead also has a recent yield of 3.9%. In the company’s most recent quarter, Gilead paid out $928 million in dividends, and spent $180 million on stock buybacks, testament to its strong free cash flow.

The company boosted its quarterly payout in March to 73 cents from 71 cents. Gilead is expected to increase its dividend in the near future.

Gilead has a big stable of drugs in areas such as HIV/Aids, liver disease, oncology, and hematology.

Pharmaceutical giant Merck boosted its quarterly dividend nearly a year ago to 69 cents a share from 65 cents, an increase of about 6%. Caroline Litchfield, the company’s chief financial officer, told analysts during the third-quarter earnings call last week, “We seek to provide a competitive return to our shareholders through both the dividend that we pay and that we expect will grow”—and by buying back stock.

The stock was recently yielding 2.8%, well above the recent average of 1.6% for the healthcare companies in the S&P 500.

Merck is expected to earn a profit of $7.52 a share next year, compared with $7.38 in 2022.

Bristol Myers Squibb, which yields 2.8%, late last year declared a quarterly dividend to 54 cents a share, up from 49 cents—the latest in a series of steady dividend increases for the big biopharmaeutical company.

Some of its biggest-selling drugs include Eliquis (a blood thinner), Opdivo (cancer), and Revlimid (cancer).

Thanks to these drugs and others, the company’s free cash flow—and its dividend—looks durable. Morningstar pharmaceutical analyst Damien Conover has described Bristol Myers Squibb’s cash flow as being “strong and stable.”

Cardinal Health is a distributor of prescription drugs, among other lines of business. In May, Cardinal Health declared a quarterly dividend of 49.57 cents a share, a modest increase from 49.08 cents.

The stock’s yield was recently at 2.6%.

For the company’s current fiscal year, it expects adjusted free cash flow to be in the range from $1.5 billion to $2 billion. That’s below last year’s $2.3 billion but it should cover the dividend.

Amgen’s yield, meanwhile, was at 2.9%.

The biotechnology company late last year declared a quarterly dividend of $1.94 a share, up 10% from $1.76. It’s expected to continue to raise that payout.

Amgen has grown the dividend every year since it was initiated in 2011. Its top-selling drugs include Neulasta, which aims to prevent infections during chemotherapy treatment, and Epogen for anemia.

The company is expected to earn $17.52 a share this year, up from $17.10 last year, and $18.70 in 2023, according to FactSet.

The dividend should grow along with those earnings.

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