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2 Top Healthcare Stocks to Buy Right Now

By Kody Kester – Sep 17, 2021 at 7:24AM

Key Points

  • The chief equity strategist at Morgan Stanley foresees a correction happening by the end of this year.
  • Medtronic is a steady medical devices maker that should hold up well if a correction does occur.
  • UnitedHealth Group is a health insurance giant that should also be a good pick to limit downside.

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Both of these stocks are healthcare leaders and they're trading at reasonable valuations.

With the S&P 500 index (^GSPC -0.12%) rallying 20% year to date, Morgan Stanley's chief U.S. equity strategist, Mike Wilson, believes that a correction could be around the corner. This would be the first correction of the year, which Wilson believes will be triggered by several factors, including valuation.

At 21 times forward earnings-per-share estimates, the average S&P 500 component is 35% more expensive than the historical average of about 15 times.

Regardless of whether the S&P 500 corrects this year, conservative investors should consider these two leading names in healthcare for their steady operating results and safe dividends.

A team of surgeons performs a surgery.

Image source: Getty Images.

A leader in medical devices

Medtronic (MDT 0.47%) is the first stock that dividend investors should consider purchasing to shore up their portfolios.

As a medical device maker, Medtronic's revenue is derived from elective procedures that are aimed at treating serious cardiovascular, spinal, and other conditions.

With the COVID-related deferral of millions of elective procedures around the world last year, Medtronic proved itself once again and delivered great operating results for the circumstances.

Medtronic's revenue advanced 4.2% year over year from $28.9 billion in fiscal 2020 (ending April 24, 2020) to $30.1 billion in fiscal 2021 (ending April 30, 2021), which was the result of growth in all of Medtronic's reportable segments, including cardiovascular, medical surgical, neuroscience, and diabetes.

Medtronic's non-GAAP EPS advanced just under a percent from $4.59 in fiscal 2020 to $4.63 in fiscal 2021.

And now with healthcare systems better prepared to handle COVID and 62% of the American population vaccinated, Medtronic's Chairman and CEO Geoffrey Martha expects that its businesses will be able to stay at or above pre-COVID levels in terms of elective procedures.

That's why CFO Karen Parkhill believes that Medtronic will grow its revenue around 9% year over year from the $30.12 billion base last fiscal year to right around $33 billion this fiscal year.

Medtronic also expects that its non-GAAP EPS will surge 22% to 24% over last fiscal year's base of $4.63 to $5.65-$5.75 this fiscal year.

Medtronic's encouraging and optimistic outlook for this fiscal year explains why the company announced an 8.6% increase in its quarterly dividend earlier this year -- its 44th consecutive annual dividend increase.

As a member of the S&P 500 with at least 25 consecutive years of dividend increases, Medtronic boasts a track record as a Dividend Aristocrat.

With a payout ratio that will fall in the mid-40% range this fiscal year, it looks as though Medtronic's 1.9% dividend yield is about as safe as they come.

Medtronic is trading at 23 times fiscal 2022 earnings and just 21 times 2023 earnings. This is arguably a fair valuation for a high-quality business such as Medtronic.

A patient meets with a physiotherapist to recover from a shoulder injury.

Image source: Getty Images.

A health insurance juggernaut

Another stock that should be on the radar of dividend investors is the mega-cap health insurance company UnitedHealth Group (UNH 0.17%).

While Medtronic was adversely impacted by COVID-19 in 2020, UnitedHealth Group actually benefited.

As a health insurer, UnitedHealth Group continued to collect its premiums from existing customers while adding new customers.

This helped UnitedHealth Group's revenue increase 6.2% year over year from $242.2 billion in 2019 to $257.1 billion in 2020, which was higher than Medtronic's revenue growth.

Reductions in certain types of medical treatment during 2020 caused UnitedHealth Group's net margin to inch higher from 5.7% in 2019 to 6% in 2020. That's because UnitedHealth Group temporarily didn't have to pay medical facilities for elective procedures, new prescriptions, and doctor visits.

In turn, UnitedHealth Group grew its adjusted EPS 11.7% from $15.11 in 2019 to $16.88 in 2020.

And even with Medtronic noting that elective procedures are now in line with or higher than pre-pandemic levels, UnitedHealth Group has thus far exceeded analysts' earnings estimates this year.

UnitedHealth Group's $10.02 in adjusted EPS through the first half of this year is moderately higher than analyst estimates of $8.81, which is what will set UnitedHealth Group up for another year of great adjusted EPS growth.

Including $1.80 per share in unfavorable COVID-19 impact as more elective procedures and office visits occur compared to last year (requiring more in claims to be paid out on UnitedHealth Group's end), UnitedHealth Group's guidance of $18.30 to $18.80 in adjusted EPS would represent 8% to 11% growth over last year.

With the way that UnitedHealth Group is executing and its low dividend payout ratio, it isn't hard to see why the company announced a whopping 16% dividend increase earlier this year.

Since UnitedHealth Group will likely pay out $5.60 in dividends per share this year, its adjusted EPS payout ratio will be in the high-20% to low-30% range.

This leaves the company with ample ability to cover its dividend, which should translate into a 1.4% dividend yield with high growth potential.

Trading at around 22 times this year's average EPS forecast and 19 times next year's average EPS forecast, UnitedHealth Group is priced at a sensible valuation for long-term investors looking to own a mighty health insurer.

Kody Kester owns shares of Medtronic and UnitedHealth Group. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.

Stocks Mentioned

UnitedHealth Group Stock Quote
UnitedHealth Group
$536.16 (0.17%) $0.90
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$4,071.70 (-0.12%) $-4.87
Medtronic Plc Stock Quote
Medtronic Plc
$79.62 (0.47%) $0.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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