Nothing beats scooping up a great bargain in the stock market, especially if the stock offers both a solid financial outlook and a dividend that keeps growing. You will not only get more income you can take to the bank, but buying at an undeserved price-slash sets you up for out-sized portfolio returns for years to come.
But with so many income-starved investors chasing dividends, where can you find these mispriced gems?
Right here. Three picks -- CVS Health Corp (NYSE:CVS), AbbVie Inc. (NYSE:ABBV), and Omega Healthcare Investors (NYSE:OHI) -- look exceptional right now. Each has been beaten down due to market bigwigs on Wall Street focusing on short-term problems and investors buying their story line. That means they're trading at bargain basement prices, at least for the present. Meanwhile, each company has a solid financial outlook and also offers terrific synergies with the changing healthcare ecosystem in America, which should give these companies and their investors a very promising future.
Let's dive in.
CVS offers diversification and can be bought near its 5-year P/E low
CVS was once a market darling, but it has been absolutely butchered this year, with the stock down 22% year-to-date, a two-year low. That puts its trailing P/E at 16.8, close to its 3-year low of 15.9, with the median over the past 13 years at 18.3. That's a hard deal to pass up on a company whose competitive position on the healthcare landscape just keeps getting stronger.
In fact, CVS has an incredible business model that features not only wide diversification and excellent synergy between segments, but terrific synergy with today's changing healthcare system. Not only is CVS one of the largest pharmacy retailers, with over 9600 stores, but it also owns a top-tier pharmacy benefits manager (PBM) that negotiates large drug pricing discounts. The combo gives it top supplier negotiating power and scale advantages, in a world where payers are becoming increasingly reliant on PBMs to help control costs. Add in the company's walk-in Minute Clinics, which provide cost-saving medical access amid a growing shortage of primary care physicians, and you've got the perfect stock for today's healthcare market.
So why is Wall Street trashing this stock? Blame it on overplayed fears about the continuing battle with competitor Walgreen Boots Alliance Inc. Back in 2012, CVS snatched Walgreen's Department of Defense military health prescription program, but this year Walgreen's snagged it back and also yanked away Prime Therapeutics' business, the nation's fourth-largest PBM.
That put a big hurt on CVS, but it's old news, and CVS's price slash shows it's more than built in. Meanwhile, pharmaceutical spending should just keep growing at a robust rate over the long-term, due to the rapid aging of the population, and the company is on track to process approximately 1.3 billion adjusted claims in 2016. In fact, management expects this company will be able to grow its profits in excess of 10% over the long term.
When it comes to a growing dividend, CVS also ticks the box. While its 2.7% dividend yield isn't terribly exciting, the pace of dividend growth certainly is. The dividend has seen 8 consecutive years of increases and annualized growth over the last three of almost 30%. With a payout ratio of 29.3% and earnings growth forecast at 11.5% annually over the next three years, there's plenty of room for increases to keep coming for investors. Fellow Fool Sean Williams, in fact, believes CVS could potentially double those dividend payments.
AbbVie's Humira pothole isn't the end of the road for this great stock
AbbVie has gone basically nowhere all year, up a measly 3%. That's actually great news because it means investors can grab a juicy 4.3% yield on a dividend aristocrat with a great future. Technically, of course, AbbVie is considered an aristocrat only because it spun out of Abbott Laboratories, which had a 40-year dividend growth streak. But since the 2013 spinoff, AbbVie has increased its dividend an impressive 42%. The payment looks extremely safe, with the company's free cash flow payout ratio in 2015 a healthy 49%, which is in line with AbbVie's payout ratios since it was spun off.
Wall Street has made a big deal of the pothole AbbVie faces when biosimilar competition to top-seller Humira comes, and the drug is indeed scheduled to lose key patent protection in the U.S. at the end of this year. While that threat shouldn't be overlooked -- Humira accounted for over 60% of sales in 2015 -- investors should note that AbbVie believes it can successfully protect Humira from competition much longer, based on industry norms and its non-composition of matter patents. These patents cover area such as manufacturing and formulation and do not begin to expire until 2022.
Be that as it may, AbbVie expects to launch over 20 new products by 2020 to achieve $37 billion in sales, which is more than a 60% increase from its 2015 revenue. Meanwhile, AbbVie is a value investor's dream, sporting a low P/E of 16, up against an average pharma sector P/E of 42, and a forward P/E of 13, compared to a sector P/E of 28. There's no guarantee that management will deliver on the pipeline and offset the drop in Humira whenever that time comes. But if you're looking for a stock with above-average growth prospects, a handsome dividend, and one that is dirt cheap, this is the stock for you.
After 20% price decline, Omega Healthcare is a buy
Prefer a high dividend payer? One potential great choice is Real Estate Investment Trust (REIT) Omega Healthcare Investors, a stock that has been smacked in the face every time the Fed and interest rates are in the news. Currently, it pays a dividend of 8.5% and trades at a 30% discount to its 10-year average valuation, making it a solid choice even with interest rates likely going higher. You may want to wait until after the Fed makes a decision in December, but Omega already trades at 8.5 times funds from operation (FFO is the better metric for evaluating REITs) compared to an average of 12.4 times FFO over the last decade. The company has grown its dividend around 10% annually over the last five years. Meanwhile, Omega's current dividend is only around 70% of FFO despite the high yield, which gives it ample coverage and headroom for a further increase. .
In general, I think the market is way too pessimistic about Omega. The company has been successful at growing its FFO per share over the past several years, in part by making savvy acquisitions. At this point, it's well diversified geographically, owning over 950 skilled nursing facilities in 40 states, not to mention last quarter's $114 million acquisition of 10 senior care homes in the U.K. In the U.S., nursing home operators are being pummeled by fears of reduced reimbursements from Medicare and Medicaid, which intensified after the presidential election. But sheer demographics should more than make up for that. As the chart below shows, population growth for the over-80 group is growing at a torrid pace, meaning demand for these facilities will just keep ramping up.
Honestly, when thinking about cuts to Medicare, I'd also keep in mind how big a voting base the elderly demographic is and how attempts to curb benefits for this group historically go down in flames. Even assuming meaningful cuts happen, that should be balanced against the strong likelihood of reduced government regulation under Republican lawmakers.
In fact, to go just a touch deeper, the nursing facility value-based program President Obama signed into law was aimed at reducing readmissions to nursing homes. That plan is now likely to be set aside, meaning the market bigwigs could have this dead wrong. Omega's long-term picture likely improved with the last election.
Without a doubt, government reimbursement schemes are very complex, and this is the riskiest of these three stocks because no one knows how the Medicare/Medicaid chess game will turn out. But I'm personally comfortable owning Omega, because this company has been playing this governmental reimbursement game for a long time, and it's proven to be a very good player. In addition, management doesn't seem worried, having set full-year guidance at $3.38 per share FFO in 2016 and reaffirmed this guidance in the latest conference call. That's up from $3.13 per share in FFO in 2015, meaning growth of about 8%.
Beat the bigwigs, focus on the big picture
Let's face it. When stocks get battered, most of the time there's a good reason. But sometimes solid, once-beloved companies with a history of delivering great shareholder returns get their prices slashed simply because market fears are overplayed.
I'd put all three of these champs in that category, meaning it's likely only a matter of time before investors fall in love with them again and come back in a strong way. You can take advantage of the great prices they now offer, or you can wait for the market's appetite to return. Just remember that reliable and growing dividend payers like these three don't pay you to sit on the sidelines -- you've got to get in the game first.
Cheryl Swanson owns shares of CVS Health and Omega Healthcare Investors. The Motley Fool recommends CVS Health. 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.