Fund managers who need to look busy might hate to admit it, but doing nothing is usually the best course of action for most investors. That doesn't mean it's a good idea to look the other way when a business you own is in trouble, but companies with durable advantages over their competitors tend to offer outsized returns in the long run.
Over the years, I've added shares of Medtronic plc (NYSE:MDT), Johnson & Johnson (NYSE:JNJ), and Omega Healthcare Investors Inc. (NYSE:OHI) to my personal holdings with the intention of holding them forever. Aging populations in the U.S. and beyond helped these three healthcare stocks deliver total returns that exceed the benchmark S&P 500's gains over the past 20 years. Here's why I think they'll continue doing so for the rest of my days.
Med-tech's 900-pound gorilla
Medtronic plc is far and away the world's largest medical device manufacturer. This gives it economies of scale that allow it to spend more researching and developing new products than giants such as Abbott and Boston Scientific, and maintain a wider operating profit margin than these big competitors.
This spending gap might not allow Medtronic to be first to market in every therapeutic area, every time. As long as the company doesn't fall too far behind, though, high switching costs keep its customers coming back. Surgeons can't just begin using a competitor's replacement heart valve without investing a great deal of time in learning how to implant and maintain it.
Another reason I look forward to keeping my Medtronic stock is management's promise to return at least 50% of the free cash flow the company generates to shareholders through dividends and share repurchases. The company has raised its payout for 40 years in a row at a stunning 17% annual growth rate.
Tear free exposure to pharmaceuticals
Johnson & Johnson offers exposure to a unique combination of consumer health brands, medical devices, and pharmaceuticals. This diversity should help smooth out any potholes the blockbuster drugs emerging from its development pipeline might hit when their exclusivity protecting patents expire.
Q-Tips, Tylenol, and Listerine might not seem exciting, but J&J's iconic brands command slightly higher prices than competing goods. At the same time, huge economies of scale keep per-unit costs at a level that makes it nearly impossible for smaller companies to compete on price.
A growing population of older, heavier adults in the U.S. and other developed nations is steadily increasing demand for joint replacements. J&J's medical device segment has a large share of this market, and high switching costs make this a fairly predictable source of profits.
In recent years, J&J's pharmaceutical segment has become its largest by revenue, and it will more than likely be its largest source of growth in the years ahead. In the first half of 2017, global sales of multibillion-dollar blockbusters Stelara, Invega, and Imbruvica rose by double-digit percentages over the first half of last year. Darzalex is growing fast enough to join their ranks in the quarters ahead, and a slew of wholly owned and licensed new drug candidates emerging from the company's pipeline has the market expecting big gains on the bottom line.
The best way to ride this long-term trend
Omega Healthcare Investors is a real estate investment trust (REIT) that owns skilled nursing and assisted living facilities in the U.S. and abroad. Every day, approximately 10,000 baby boomers celebrate their 65th birthday. Thanks in part to the first two companies on this list, they're expected to live longer than any previous generation. I expect this trend to help my third forever stock on this list deposit heaps of dividend income into my brokerage account for the rest of my days.
Omega Healthcare collects rent from over 75 skilled nursing and assisted living facility operators through long-term, triple-net leases. Under this form of lease, the operators remain responsible for expenses that tend to fluctuate, such as maintenance, upgrades to meet new regulations, and property taxes. This means Omega Healthcare receives a highly predictable source of profits that it passes on to its shareholders in the form of dividends.
This REIT has the unusual tendency to raise its dividend payout every three months and has done so for 20 straight quarters. Each increase tends to be small, but they add up quickly. Over the past five years, the quarterly payout has risen 52% from $0.42 to $0.64, for a juicy forward yield of at least 8.35% at recent prices.
When it comes to high switching costs that keep customers coming back, Omega takes the cake. Relocating patients, employees, and equipment to a competitor's facility is almost always more expensive than any potential savings. That makes this a great stock to keep indefinitely.
Cory Renauer owns shares of Johnson & Johnson, Medtronic, and Omega Healthcare Investors. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool owns shares of Medtronic. The Motley Fool has a disclosure policy.