3 high-dividend healthcare stocks for passive income
The global economy has slowed significantly in recent times, mainly due to aggressive interest rate hikes carried out by central banks in an effort to restore inflation to normal levels. As a result, the risk of an upcoming recession has increased significantly.
Most healthcare stocks are resilient to the recession, as consumers don’t reduce medical costs even in adverse economic conditions.
Here we’ll discuss the outlook for three healthcare stocks that offer above-average dividend yields and good growth prospects.
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Attractive pricing and key advantages
GSK Corporation (GSK), formerly GlaxoSmithKline, headquartered in the United Kingdom, develops, manufactures and markets healthcare products in the pharmaceutical, vaccine and consumer products sectors. Its pharmaceutical services are related to the following categories of diseases: central nervous system, cardiovascular, respiratory and immune inflation.
GSK has an important competitive advantage, namely its focus on research and development. The company invests heavily in research and development. In 2022, it spent nearly 13% of its revenue on research and development.
On the other hand, GSK has shown an unstable performance, mainly due to a number of patent expirations and large fluctuations in exchange rates. For example, Advair’s patent that expired in 2019 affected the company’s results for the following two years. Overall, GlaxoSmithKline has only grown earnings per share by an average of 0.9% per year over the past nine years.
On the other hand, GSK’s other respiratory products are experiencing strong growth. The company also has several vaccines that are experiencing high sales growth. Therefore, GSK is likely to increase its growth rate in the coming years.
Notably, the stock is currently trading at its lowest price-earnings price in nearly 10 years of 8.3, well below the stock’s historic average of 13.0. The cheap valuation is the result of a slightly dimmer near-term growth outlook and the impact of inflation on stock valuations, as high inflation reduces the present value of future earnings.
However, the Fed has prioritized restoring inflation to its long-term target of 2%. Thanks to strong interest rate hikes, inflation has fallen every month since peaking last summer. Therefore, it is reasonable to expect the Fed to sooner or later accomplish its goal. As inflation declines to normal, GSK’s stock is likely to be priced sharply with the wind.
It’s also important to note that the stock is offering a dividend yield of over 4%. The company has a reasonable ratio of 42% and a strong balance sheet, with a solid interest coverage ratio of 9.3. Given GSK’s resilience to a recession, its dividend should be considered safe for the foreseeable future. The only caveat for US investors is the dividend sensitivity to the GBP-USD exchange rate.
Short history, great prospects
Organon & Co. (OGN) is detached from Merck (A) in June 2021. Organon is a pharmaceutical company that develops and markets health solutions in many fields. Its long-standing brand portfolio includes nearly 50 products that have lost their patents and are used for treatment in the fields of cardiology, respiratory and dermatology, and non-opiate pain management. Organon’s women’s health product portfolio includes fertility and contraceptive brands, such as Nexplanon/Implanon and NuvaRing.
The company also has a small portfolio of biosimilar drugs, used in immunology and oncology. The subsidiary moved 15% of sales, 25% of production sites, and 50% of products from Merck to Organon.
Organon has several key growth drivers in place. The longstanding brands that previously belonged to Merck will provide Organon with strong free cash flow, as patent-free products do not require high research and development costs.
In addition, the women’s health business has long been a pioneer in this field since its founding in 1923. The company first produced hormonal contraceptives as well as combined oral contraceptives. low dose estrogen first. More recently, Organon developed the first monthly IUD.
Biosimilars make up only a small portion of Organon’s sales, but the company is trying to expand this segment. Organon will launch a biosimilar to Humira, a blockbuster drug, in the US this year. With Humira sales so high over the past decade, Organon’s biosimilar could prove to be a material growth driver for the company in the years to come.
Additionally, Organon currently offers a dividend yield of 4.6%, with a fixed payout ratio of 26%. Since the company has a strong balance sheet, with an interest coverage ratio of 4.1, dividends are safe for the foreseeable future.
It’s also important to note that the stock is trading at a price-to-earnings ratio of just 5.5. The cheap valuation is mainly due to the short history of the company being spun off. If Organon proves it can stabilize or increase earnings, its stock will almost certainly have a much higher valuation.
27 years of dividend growth
Sanofi (SNY), the world’s leading pharmaceutical company, was founded in 1994 and is headquartered in France. The company, with a market capitalization of $119 billion, develops and markets a variety of vaccines and treatments. Pharmaceuticals accounted for 72% of sales, vaccines accounted for 15% of sales, and consumer healthcare contributed the rest. It generates a third of sales in the US, more than a quarter of sales in Western Europe, and the rest in emerging markets.
Sanofi’s intensive care division, particularly in the areas of rare diseases and immunology, has demonstrated high growth rates. Some of these products, such as Dupixent, are just starting to gain traction. As a result, these products will likely remain the main growth drivers for many more years to come.
Sanofi has also driven growth through significant acquisitions. Furthermore, since the company’s products are used to treat diseases, demand for them remains stable even during difficult economic times. This is an important factor to consider, especially with the growing risk of an upcoming recession.
Sanofi has shown a somewhat erratic but decent performance record. Over the past nine years, the company has grown earnings per share by an average of 7.4% annually. Given the promising growth prospects of some of its products, Sanofi is likely to continue to grow EPS at a mid-single digit rate in the coming years.
Sanofi has increased its dividend for 27 consecutive years in local currency. US investors may experience volatility in dividends due to currency fluctuations but Sanofi’s dividend is certainly attractive. Sanofi currently offers a 4% dividend yield, which is in line with the stock’s previous average dividend yield. Thanks to a reasonable payout ratio of 44% and a solid, nearly debt-free balance sheet, the company is likely to continue to raise its dividend for many more years to come.
It’s also important to note that Sanofi is trading at a near 10-year low above-earnings price of 10.7. This is much lower than our assumed fair earnings multiple of 16.0, which is consistent with the stock’s historical valuation and valuations of its peers. Whenever the stock returns to its normal valuation, it offers high returns for investors.
A recession is inevitable every few years, and therefore, income-oriented investors should always try to identify stocks that are resilient to a recession. This is especially true in the current investment climate, in which the risk of a recession has increased dramatically due to unprecedented interest rate hikes by central banks.
The three names above are quite resilient to the recession, have good growth prospects and are delivering above-average dividend yields, with a wide margin of safety.
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