Improved life expectancy and higher rates of chronic health conditions are expected to drive global healthcare spending higher, from $8.45 trillion in 2018 to over $10 trillion by 2022.
With this spending run rate likely to continue beyond 2022, investing in well-established and diverse healthcare companies that have inherent competitive advantages could be the road to generating wealth -- provided investors are looking at long enough investing time frames.
Here's why I believe health insurer UnitedHealth Group (UNH -0.34%), pharma stock Merck (MRK -1.38%), and medical devices company Stryker (SYK -2.56%) look perfectly positioned to capitalize on the growing demand for healthcare.
1. UnitedHealth Group
UnitedHealth Group is the largest health insurer globally, with a market capitalization of $446 billion. The company's market cap is larger than the next five largest health insurers combined.
Thanks to the increase in demand for health insurance over the years, UnitedHealth Group's revenue has grown at a 9% compound annual growth rate over the past five years. Earnings, in turn, have grown at a nearly 24% clip during that time.
Due to increasing medical expenses worldwide, the global health insurance market is expected to expand at a 9.8% rate annually, from $1.8 trillion in 2020 to $3.4 trillion by 2027. The rising tide of surging demand for health insurance should lift all boats (i.e., health insurers). But as the largest health insurer on the planet, none will benefit more than UnitedHealth Group.
Not surprisingly, Street analysts anticipate UnitedHealth's earnings will grow at 15% each year through the next five years. Investors can purchase UnitedHealth Group's market-matching 1.3% dividend yield at a price-to-earnings (P/E) ratio of 21.3 for this year, which makes it a sensibly priced blue-chip dividend growth stock. This is backed up by the stock's dividend payout ratio of 29.4% last year, which leaves it plenty of room to grow.
Merck is the seventh-largest pharma stock globally, with a market cap of $194 billion.
Given ever-higher demand for pharmaceutical treatments, Merck's non-GAAP (adjusted) diluted earnings per share (EPS) have advanced nearly 9% annually in the past five years. Despite Merck's massive size, analysts are forecasting that the company's earnings growth will accelerate to 10% in the next five years. Why are analysts so optimistic about Merck's future?
The primary reason is Merck's robust drug pipeline. The company has 71 programs in phase 2 clinical trials and 25 in phase 3 clinical trials across numerous therapy areas like oncology, respiratory and immunology, and diabetes and endocrinology. This should translate into multiple regulatory approvals in the years ahead, driving revenue and earnings higher.
The other reason is the pharmaceutical industry's promising growth forecast in general. Currently, it's predicted to grow 6% annually from $1.1 trillion this year to $1.38 trillion by 2026.
Income investors can pick up Merck's market-topping 3.6% dividend yield at a P/E ratio of 10.4, which is an attractive valuation for its growth potential.
Stryker's market cap of $100 billion makes it the fourth largest medical devices stock in the world.
As a result of increased demand for medical devices, Stryker's earnings grew nearly 12% per annum over the past five years. This healthy growth also looks like it can continue in the years to come.
The medical devices industry is forecasted to grow at a 5.4% annual rate from $455.3 billion last year to $658 billion by 2028. Street analysts expect Stryker's earnings to grow at 11% annually in the next five years.
Investors can scoop up Stryker's 1.1% dividend yield at a P/E ratio of 25.4. For a stock with inflation-crushing attributes, this isn't an unjustifiably high valuation.