Many healthcare stocks have been under the weather this year amid concerns about the advent of weight-loss drugs, weaker Covid-related sales, and the market’s narrow focus on a handful of tech names.
But income investors have a chance to snap up some healthcare stocks with healthy and durable dividend growth.
“The demographics alone are a huge tailwind for this sector,” says Stephanie Link, chief investment strategist at Hightower Advisors. “These companies are cash-rich, and they are constantly focused on innovation.”
Andy Acker and Daniel Lyons of the
Janus Henderson Global Life Sciences
fund in a note cited “attractive valuations” and “numerous medical advances” among the potential catalysts for the sector.
The price-to-earning ration of the S&P Biotechnology Industry index, was recently 25% off its 30-year average, they note.
Another advantage the sector has relative to, say, consumer staples is that “healthcare offers some secular growth,” says Chris Senyek, chief investment strategist at Wolfe Research.
No doubt, 2023 has been a forgettable year for many healthcare stocks. The
Health Care Select Sector SPDR
exchange-traded fund is down about 2% in 2023, including dividends, compared with a 21% return for the
S&P 500.
Chris D’Agnes, a partner at Hamlin Capital Management, says that with their defensive traits, healthcare stocks are well positioned to get through a recession if that does occur next year.
“In years when the stock market goes down, you generally want to own healthcare,” D’Agnes says, adding that “Probably some of what’s happening this year is that the recession never showed up.”
Two healthcare stocks he holds are
Johnson & Johnson,
which yields 3%, and pharmaceutical company
AbbVie,
4.3%. Spun out of
Abbot Laboratories
in late 2012, AbbVie relied heavily on blockbuster drug Humira for its growth and profitability. That drug, whose uses include treating rheumatoid arthritis, recently lost its patent protection.
But two of AbbVie’s newer immunology drugs—Skyrizi (psoriasis and Crohn’s disease) and Rinvoq (rheumatoid arthritis)—both generated more than $1 billion in sales in the third quarter.
Johnson & Johnson is a play on pharmaceuticals and med tech products such as hip implants, both of which serve a big need as baby boomers age.
Link of Hightower points out that Johnson & Johnson’s stock, down about 10% this year, fetches a reasonable 15 times forward earnings estimates and that the company has raised its dividend for 61 straight years. “I like the solid pharma, and I like the medical device” businesses, says Link, adding that she expects the company to grow earnings and revenue in the mid single digits.
AstraZeneca
sports a yield of 2.3%. The company has a diverse mix of drugs, says Acker, but it’s very strong in oncology with drugs such as Tagrisso for certain types of lung cancer.
Cancer therapies, which account for about 40% of the company’s sales, totaled about $13.5 billion in the first nine months of this year, up 20% from a year earlier. Acker estimates the stock is changing hands at about 15.5 times its 2024 consensus profit estimate.
One potential headwind: healthcare stocks, including pharmaceuticals and managed-care firms, can come under pressure during presidential election years owing to concerns about more regulation. Senyek, however, says that “much of that’s priced into the stocks after they’ve underperformed year to date.”
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