Income investors often hunt for stocks in the healthcare sector because demand for healthcare isn't as tightly tied as other sectors to economic whims and whispers. However, not every dividend-paying stock in healthcare deserves a spot in investors' income portfolios. For instance, these three healthcare stocks offer seemingly attractive yields, but I'm avoiding all three of them right now.
No. 1: Out of balance
Dividend payments can be a great way to generate bigger returns, but that's only true if the company paying those dividends is on firm enough financial footing to guarantee that those payments are going to keep on coming.
Unfortunately, that could be a problem down the road for Computer Programs and Systems (NASDAQ:CPSI), a healthcare IT company that's got a dividend yield of 5.04%.
CPSI markets software solutions to small and midsize hospitals, and while there's a lot of demand for healthcare IT, the company's balance sheet makes me nervous -- especially since it's competing against foes with deeper pockets, including Cerner Corp and athenahealth.
Last quarter, CPSI's earnings per share tumbled 66% versus last year, and that drop-off concerns me given that its big acquisition of Healthland has saddled the company with $145 million in short- and long-term debt and left it with only $16 million in short- and long-term cash exiting the second quarter.
That balance sheet could put CPSI at a disadvantage to Cerner and athenahealth, which have $630 million and $134 million in cash on the books, respectively. It's also forcing CPSI to make some changes to how it determines its dividend payout.
In the second quarter, CPSI's board adopted a variable dividend policy that limits dividends to 70% of the preceding quarter's non-GAAP earnings per share. The new policy gives the company flexibility to improve its balance sheet, but it creates a lot of uncertainty regarding its future dividend yield.
Overall, while the Healthland deal could offer some sales and cost synergies that support dividend payouts down the road, I think it's best to wait until those synergies play out before buying this stock for my income portfolio.
No. 2: Turning a freighter
GlaxoSmithKline PLC (NYSE:GSK) is one of the planet's biggest drugmakers and its 5% dividend yield makes it the top yielding stock in biopharma. However, the company could face a cash crunch soon.
The company generates about 15% of its sales from Advair, a drug that's used to treat asthma and COPD, and the patents protecting Advair have already expired. So far, patent protection on the Diskus inhaler that administers Advair has kept generic competition at bay, but Diskus patent expires this year and generic drugmakers are circling. For example, Mylan (NASDAQ: MYL) filed for FDA approval of its generic Advair earlier this year, and the FDA has set a GDUFA decision date of March 28, 2017 for the drug.
In preparation for Advair competition, GlaxoSmithKline has launched new asthma and COPD drugs, but those drugs have yet to achieve revenue run rates that would insulate investors against lost Advair sales. Last year, Advair Diskus sales were $4.8 billion.
GlaxoSmithKline is also restructuring to free up cash so that it can keep its dividend unchanged at 80 pence per share through next year. After that, a stable or growing dividend depends heavily on Advair's competitive situation.
No. 3: The pressure is on
Another high-yielding dividend healthcare stock that's got generics nipping at its heels is AstraZeneca (NYSE:AZN).
In Q2, AstraZeneca's sales slipped 11% and its EPS fell 31% from last year. The drop-off was due primarily to the entry of generic alternatives to its top-selling cholesterol drug, Crestor. After Crestor's patent expired, Allergan's Watson rolled-out the first generic alternative to it in May. As a result, Crestor's sales fell 29% year over year to $926 million in Q2. That's painful, but since Crestor's sales run rate is still about $3.7 billion and the drug accounts for about 20% of sales, there's plenty more risk to the company's top line -- especially since other competitors launched generic alternatives to Crestor in July.
AstraZeneca's management expects its top line will decline in the low- to mid-single-digit percentages this year, and the company's outlined a R&D program it believes can restore long-term growth, so management may be able to keep that 2.7% dividend yield flowing. However, there's no guarantee of that, and that's why I'm content to sit on the sidelines on this stock, too.
Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. Like this article? Follow him on Twitter where he goes by the handle @ebcapital to see more articles like this. The Motley Fool recommends athenahealth, Cerner, and Mylan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.