Healthcare Stocks Offer Dividend Growth Potential

3 Mins read

Many healthcare stocks have faced challenges this year, but income investors can find opportunities in healthcare stocks that offer healthy and durable dividend growth. Despite concerns about weight-loss drugs, weakened Covid-related sales, and the market’s narrow focus on a few tech names, the sector is benefiting from favorable demographics and a commitment to innovation.

Stephanie Link, chief investment strategist at Hightower Advisors, highlights the positive impact of demographic trends on the sector, stating, “The demographics alone are a huge tailwind for this sector.” She emphasizes that healthcare companies are financially strong and consistently focused on driving innovation.

Andy Acker and Daniel Lyons of Janus Henderson Global Life Sciences point out that the healthcare sector offers attractive valuations and benefits from numerous medical advances as potential catalysts. They highlight that the price-to-earnings ratio of the S&P Biotechnology Industry index is currently 25% lower than its 30-year average.

In contrast to consumer staples, healthcare provides some secular growth, according to Chris Senyek, chief investment strategist at Wolfe Research. This characteristic makes healthcare stocks an appealing choice for investors seeking long-term growth opportunities.

While 2023 has generally been a challenging year for healthcare stocks, with the Health Care Select Sector SPDR exchange-traded fund experiencing a 2% decline (including dividends) compared to a 21% return for the S&P 500, Chris D’Agnes, a partner at Hamlin Capital Management, suggests that healthcare stocks are well-positioned to weather a potential recession next year due to their defensive qualities.

D’Agnes advises, “In years when the stock market goes down, you generally want to own healthcare.” He also points out that the absence of a recession this year may have contributed to the current performance of healthcare stocks.

In conclusion, despite recent difficulties, healthcare stocks present an opportunity for income investors seeking dividend growth. The sector’s positive demographic trends, focus on innovation, attractive valuations, and potential catalysts make it an appealing choice amid broader market uncertainties.

Johnson & Johnson: A Solid Investment

Johnson & Johnson, one of the prominent healthcare stocks, presents a compelling investment opportunity. With a dividend yield of 3%, this company offers stability and consistent returns. The pharmaceutical giant not only focuses on developing innovative drugs but also produces cutting-edge medical technology products like hip implants, catering to the increasing needs of aging baby boomers.

Despite experiencing a downturn of about 10% this year, Johnson & Johnson’s stock is reasonably valued at 15 times forward earnings estimates. Moreover, the company has an impressive track record of raising its dividend for 61 consecutive years. This commitment to consistent growth, coupled with its strong presence in the pharmaceutical and medical device sectors, positions Johnson & Johnson for robust earnings and revenue growth in the near future.

AbbVie: Leveraging Newer Immunology Drugs

AbbVie, a pharmaceutical company known for its reliance on the blockbuster drug Humira, has successfully diversified its drug portfolio to ensure sustained growth. While Humira faced challenges due to the loss of patent protection, AbbVie’s newer immunology drugs, Skyrizi (used for treating psoriasis and Crohn’s disease) and Rinvoq (targeting rheumatoid arthritis), have emerged as major revenue-generating assets for the company.

In the third quarter alone, both Skyrizi and Rinvoq recorded sales surpassing $1 billion each. This promising performance indicates AbbVie’s ability to adapt and thrive amidst changing market dynamics. With a dividend yield of 4.3%, AbbVie remains an attractive option for investors seeking exposure to the healthcare sector.

AstraZeneca: A Powerhouse in Oncology

AstraZeneca stands out as a force to be reckoned with in the field of oncology. Boasting a dividend yield of 2.3%, the company maintains a diversified drug portfolio, but it truly shines in the area of cancer treatment. Notably, AstraZeneca’s drug, Tagrisso, has proven highly effective in combating certain types of lung cancer.

With cancer therapies accounting for approximately 40% of AstraZeneca’s sales, the company witnessed a substantial increase of 20% in this segment’s revenue during the first nine months of the year, amounting to $13.5 billion. This impressive performance, combined with a stock price trading at around 15.5 times its estimated 2024 profits, makes AstraZeneca a compelling investment opportunity for those interested in the healthcare sector.

Considerations and Outlook

Despite the potential headwinds faced by healthcare stocks during presidential election years due to regulatory concerns, experts argue that these concerns have largely already been reflected in the stock performance thus far. Consequently, any volatile movements associated with regulatory uncertainties may already be factored into the stocks.

Therefore, investors should carefully evaluate the opportunities presented by healthcare stocks, such as Johnson & Johnson, AbbVie, and AstraZeneca. With their strong fundamentals and potential for growth, these companies exhibit resilience and promise within the healthcare sector.

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