One great reason to consider buying healthcare stocks is that demand for their products tends to remain stable in good times and bad. After all, no one gets to choose when they get sick. That makes the healthcare sector a great place to hunt for income ideas.
So which dividend stocks do our team of healthcare experts think are worthy of consideration? We asked them that very question and they picked Gilead Sciences (GILD 0.07%), Allergan (AGN), and LeMaitre Vascular (LMAT -0.31%).
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Turning the page
George Budwell (Allergan): Allergan, under the stewardship of CEO Brent Saunders, has made a name for itself as a top merger-and-acquisition player in the healthcare sector. Saunders' overarching strategy has been to acquire small to mid-sized companies with promising late-stage pipelines, thereby lowering the risk of costly clinical failures. This so-called "growth-by-acquisition" has helped the company build out an impressive portfolio of branded growth products that have strong economic moats and pivot away from the struggling generic drug space that's experiencing an influx of new competitive threats at the moment.
On this front, Allergan's $40.5 billion divestiture of its generic drug segment last year resulted in the company shifting gears to some degree from a valuation creation standpoint. Instead of continuing to aggressively pursue acquisitions in breakneck fashion, Allergan's management decided to use a portion of this massive windfall to institute a modest dividend program.
Although Allergan's current yield of 1.2% is below average for its peer group, and its dividend program could take a step back if Allergan divests its sizable stake in Teva Pharmaceutical Industries as many expect, this dividend-paying pharma stock is arguably attractively priced at current levels. The drugmaker's shares, after all, are only trading at around 13 times its forward-looking earnings, which is well below the prevailing norms within the industry.
Allergan is also on track to grow its top line by high-single digits over the next few years -- despite key products like Namenda XR losing exclusivity. That speaks volumes about management's keen ability to continually refresh the company's pipeline with high-value new growth products.
All told, Allergan appears primed to appreciate significantly once it closes the book on both its Teva stake and ongoing product churn -- arguably making it worth a deeper dive right now.
A specialty medicines cash cow
Sean Williams (Gilead Sciences): Biotech blue-chip Gilead Sciences may not have much of a dividend history (it's only been paying a quarterly dividend for two years), but it's quickly become a go-to income stock in the healthcare sector, which is itself not very well known for dividends.
Gilead's secret sauce that allows it to pay out a healthy 2.5% yield is the company's significant market share in two specialty indications, as well as its ability to make earnings-accretive acquisitions with its substantial cash flow.
Gilead's primary claim to fame is its trio of hepatitis C virus (HCV) effective cures: Harvoni, Sovaldi, and Epclusa. In particular, Harvoni and Sovaldi changed the way HCV was treated. These are once-daily treatments with hefty price tags that often delivered cure rates north of 90%, depending on the HCV genotype in clinical trials. Though Gilead has already treated many of the sickest HCV patients in the U.S., there's still a multiyear or multidecade opportunity to treat the roughly 180 million people worldwide with HCV, according to the World Health Organization.
The company is also a key player in the HIV market with next-generation, single-tablet therapies like Odefsey, as well as Descovy and Genvoya. HIV, unfortunately, has no effective cure as of yet, but it does have just a small handful of players (of which Gilead is one) that have developed treatments to significantly slow disease progression. A double-digit annual growth rate in HIV isn't out of the question over the next five or more years, in this writers' opinion.
Finally, Gilead is able to use acquisitions to alter its destiny. Its purchase of Pharmasset in 2011 for $11 billion is what launched its HCV product line, while its recent announcement that it was buying Kite Pharma (NASDAQ: KITE) for $11.9 billion should allow it to branch out into oncology. Kite Pharma is on the leading edge of CAR-T research, which involves modifying and multiplying a patient's T-cells to more effectively track down and kill cancer cells. CAR-T has been especially intriguing in fighting blood cancers.
Put this all together and we have a healthcare dividend stock that's generated more than $13 billion in free cash flow over the trailing 12 months. Long story short, future dividend hikes and a healthy payout should become the norm for Gilead and its shareholders.
An under-the-radar dividend payer
Brian Feroldi (LeMaitre Vascular): While LeMaitre Vascular's dividend yield of 0.6% might not sound all that impressive, I'm convinced that the rest of the business is so high quality that this income stock is still worthy of an income investor's attention.
LeMaitre is a medical device company that sells products that are used during vascular surgery. The company's products include shunts, grafts, patches, and catheters, all of which are used to treat peripheral vascular diseases (PVD).
One way that LeMaitre sets itself apart from other PVD product sellers is that the company almost exclusively focuses on niche product segments. Nearly all of the company's revenue comes from addressable market segments that generate less than $125 million in annual sales. That's far too small for major medical device companies to focus on. In turn, there isn't a lot of competition in the space. That fact allows LeMaitre to more easily dominate each of its target niches.
A look at the company's history shows just how attractive this niche-focused strategy can be. LeMaitre's revenue is up about 75% over the last five years (thanks to regular price increases and acquisitions) while its profits have soared more than 516%. Its stock price has responded in kind.
Looking ahead, LeMaitre's growth plan seems achievable and straightforward. The company is going to expand geographically, steadily roll out new products, acquire other niche vascular product makers, and push through regular price increases. I think that this plan will enable the company to deliver on its long-term target of 20% operating income growth annually. Throw in the small dividend that only consumes about 28% of profits and I think that LeMaitre is a wonderful business for growth-minded income investors to consider.
