Written by Bob Ciura for Sure Dividend
The healthcare sector is one of the few that tends to perform well regardless of the state of the economy. Healthcare companies are resilient, even during recessions. When hard times hit, people will cut many items from their budget, but most will still prioritize their healthcare.
Not only are they resistant to recessions, but healthcare stocks should see a major tailwind from the aging population. In the U.S., the number of adults age 65 or older is expected to double by the year 2050. By 2030, nearly one in five people in the country is projected to be at least 65.
Healthcare related needs often increase as a person grows older, meaning the sector is likely to see higher demand for its products and services over time. This will provide meaningful lift to revenue and earnings for these companies.
Three of our favorite healthcare stocks with high dividend yields and the potential for strong total returns include:
- AbbVie Inc. (ABBV)
- Bristol-Myers Squibb Company (BMY)
- Johnson & Johnson (JNJ)
First up on our list of favorite healthcare names is AbbVie, which specializes in bringing products to market that are used to treat aliments in the areas such as immunology, oncology and eye care. The $222 billion company produced revenue of $46 billion in 2020.
AbbVie has grown into a power house in its own right following the 2013 spinoff from Abbott Laboratories (ABT). Much of this gain has been accomplished on the strength of Humira, used to treat rheumatoid arthritis. Once the bestselling drug in the world, Humira has seen its international revenue decrease in recent years as the drug has hit the patent cliff.
The drug will also lose its patent protection in the U.S. in 2023, though sales in the region remain solid, growing more than 10% in the most recent quarter. Clearly, however, Humira’s best days are behind it.
The good news is that AbbVie has multiple newer drugs that are expected to see high growth rates in the coming years. Skyrizi and Rinvoq are two drugs that have already shown explosive growth in a short amount of time. The two products have revenue of $796 million and $453 million, respectively, in the third-quarter, but Skyrizi grew 83% from the prior year while Rinvoq more than doubled. In total, the two drugs could see sales double in 2021 compared to last year, with peak sales in the $3 to $6 billion dollar range for each.
AbbVie also added Allergan last year in a deal that brought the company several products, including Botox, that will bring in additional revenue from areas that the company doesn’t have much of a presence.
Leadership is so confident about the product pipeline that 2025 revenues are expected to surpass last year’s results. We agree that the future beyond Humira looks bright for AbbVie and expect the company to produce earnings-per-share of 3% annually through 2026.
Including its time spent as part of Abbott Laboratories, AbbVie has five decades of dividend growth. The stock also has a high yield of 4.5% today, which is more than three times the average yield of the S&P 500 Index.
Due in large part to the concerns of Humira, AbbVie has a price-to-earnings ratio of 10, which we feel is a good starting spot for a 2026 valuation target. We don’t anticipate valuation having much of an impact on total returns at this point.
Therefore, we expect that AbbVie will provide a total return of 7.5% per year through 2026 due to a 3% earnings growth rate and a yield of 4.5%. AbbVie’s total return prospects aren’t the highest, but income investors will likely be drawn to the company’s history of dividend growth and the high dividend yield.
Next up on our list of favorite healthcare stocks is Bristol-Myers, which produces medical products, pharmaceuticals, diagnostics and infant formula, among other products. The $125 billion company has been in existence since the late-1880s and generates annual revenue approaching $43 billion.
Bristol-Myers has a global business that has demonstrated considerable strength over the years. Sales for both the U.S. and international markets grew by a double-digit rate in the most recent quarter.
This growth was due to a wide variety of market leading products. One of the company’s best-selling products is Eliquis, which works to prevent blood clots, which is on pace to deliver more than $10 billion in sales this year. Eliquis has been the leading oral anticoagulant in several markets over the past few years, cementing the drug as the top choice amongst the healthcare industry.
In cancer, Opdivo, which treats advanced renal carcinoma among other types, has seen accelerated market share recently. The medicine brought in close to $2 billion last quarter.
Bristol-Myers hasn’t been shy about making acquisitions to augment its core business. The company’s $74 billion purchase of Celgene Corporation in late 2019 brought to the company a host of products, including Revlimid, which treats multiple myeloma. Revlimid generated revenue of nearly $3.4 billion last quarter.
Given the strength of the company’s product group, we believe that Bristol-Myers will see earnings-per-share grow at 3% annually through 2026.
Following a 10.2% dividend increase for the upcoming February 1st, 2022 payment date, Bristol-Myers has increased its dividend for 15 consecutive years. Shares yield 3.7% at the moment.
Also factoring into total returns will be the possibility of significant multiple expansion. Bristol-Myers trades at 7.9 times expected earnings-per-share for 2021. We anticipate that the stock could trade with a price-to-earnings ratio of 13.5 by 2026, which is close to the average valuation of most large pharma companies. If this were to occur then valuation would add 11.3% annually to total returns for the next five years.
We project that Bristol-Myers will earn 18% annually through 2026, stemming from a 3% earnings growth rate, 3.7% dividend yield and a low double-digit contribution from multiple expansion. Bristol-Myers has one of the highest potential total returns in our coverage universe. Shares earn a buy rating as a result.
Johnson & Johnson
Our final top pick from the healthcare sector is Johnson & Johnson. With a market capitalization of $436 billion, the company is one of the largest in the world. The company generates annual revenues of more than $94 billion.
One of the key strengths of the company is that it operates a diversified business model. Half of revenues come from Johnson & Johnson’s pharmaceutical segment, with the medical device segment contributing a third and consumer accounting for the remaining.
This importance of diversification was on display in 2020 as the pandemic curtailed elective surgical procedures as the healthcare system dealt with the impact of the COVID-19. As a result, medical device revenue was severely impacted. However, a good showing in the other businesses meant that revenue for the year was actually higher by a small amount.
Johnson & Johnson also has market leading products throughout its business. Pharmaceutical has shown high rates of growth in a number of areas. For example, sales of Darzalex, which treats multiple myeloma, surged more than 50% last quarter as the product continues to see its global market share increase. Stelara, which treats immune-mediated inflammatory disease, was up 17% due to gains across several indications. The company also has a highly effective single dose vaccine for COVID-19, something other pharmaceutical companies have failed to create.
The company’s Medical Device segment provides products used in hip and knee replacement and heart surgery. In Consumer, Johnson & Johnson’s top products such as Listerine, Aveeno, Band-Aids and Tylenol are trusted brands people have used for decades. Investors should note that the company announced recently that it is planning to spinoff of its Consumer segment, but this isn’t likely to occur until 2023 at the earliest.
We expect that the company’s earnings-per-share will grow 6% annually over the next half-decade, slightly ahead of its long-term average given the quality of the businesses that it holds.
Johnson & Johnson’s well-run business has enabled it to grow its dividend for more than 59 consecutive years. Shares yield 2.5% today.
The stock has a price-to-earnings ratio of 17.1 based on the midpoint of the company’s guidance. We believe a starting valuation of 17 times earnings for Johnson & Johnson is an appropriate given the high-quality nature of the company. At this point, valuation doesn’t appear to be much of a factor in total returns.
Johnson & Johnson is expected to return 8.3% per year through 2026 due to a 6% earnings growth rate, 2.5% starting yield and a slight headwind from multiple reversion. Typically, we require stocks to produce at least 10% total returns to earn a buy rating, but Johnson & Johnson is a stalwart in its industry and has numerous competitive advantages that we feel make the stock an attractive name to own.
Healthcare is a rare sector of the economy that is resilient during a recession. Companies in this sector typically offer products and services that are needed to maintain a person’s quality of life. Aging populations in the U.S. and elsewhere provide healthcare stocks with a growth catalyst.
AbbVie, Bristol-Myers and Johnson & Johnson are three of our top healthcare stocks, as they are all leaders in their respective industries with multiple tailwinds to provide growth. These stocks have long dividend growth histories, market-beating yields, and reasonable valuations.