The healthcare sector is often thought of as "defensive" for investors because it's largely immune to business cycles. It doesn't matter if the economy is crashing or soaring, people will still need to see their doctors, take their medications, and treat or otherwise control their illnesses. So while no stock can ever be called 100% safe, stocks in the healthcare space are often great places to park some money.
Within this sector, there are all sorts of options, including drugmakers and medical device companies. We asked three of our contributors to single out the ones that they viewed as among the safest stock picks for long-term investors. Here's why they recommend Stryker (SYK 0.09%), Intuitive Surgical (ISRG -0.50%), and Johnson & Johnson (JNJ -1.15%).
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The company that keeps you running
Patrick Bafuma (Stryker): For the safest healthcare stock in the world, just turn to a company that provides hospitals with the tools necessary to perform their everyday procedures. From the hardware needed for knee replacements, endoscopy, neurosurgical interventions, and a host of other procedures, Stryker is there. Its customer base spans the world across multiple service lines, too, making this bellwether stock as sturdy as they come.
This medical device company has performed well for its shareholders over most meaningful time frames. For example, it has beaten the S&P 500 over the last five, 10, and 20 years, with gains of 103%, 292%, and 800% vs. 87%, 214%, and 290%, respectively. It's even outperforming in 2022, down by just 2% compared to the more than 8% decline for the broad index. Not only that, but this industry stalwart has been steadily paying a small quarterly dividend since the start of 2010. With $17.1 billion in net sales in 2021 and a current addressable market of $72 billion, it has room to keep growing. Not to mention that its addressable market is expected to grow at an annualized percentage rate in the mid-single digits through 2026.
If you are looking for stability and safety, Stryker should be high on your watch list. This $98.8 billion healthcare company has historically outpaced the market, and shareholders would do even better if they reinvested its dividend. And with seniors accounting for a large and growing share of the population, more people are likely to need what this company provides as time goes on. Stryker looks like a set it and forget it stock you can rest easy holding in your portfolio.
A proven winner
George Budwell (Johnson & Johnson): Diversified healthcare giant Johnson & Johnson is the epitome of a safe investment for three key reasons. First, it is one of only two U.S.-based companies with an AAA credit rating from Standard & Poor's (S&P). What this means is that S&P views J&J's balance sheet to be only modestly less risky than that of the U.S. federal government. That's a testament to management's sound financial decisions over the decades.
Second, it is one of the Dividend Kings -- elite companies that have raised their annual payouts for no less than 50 consecutive years. J&J, for its part, is expected to boost its dividend for the 60th straight year sometime this month.
At its current share price, the healthcare behemoth's yield of 2.35% is slightly below average for its immediate peer group. But with a 12-month trailing payout ratio of just 53% and ever-rising free cash flows, the company's dividend program is among the safest in its sector.
Third, in terms of annual global revenues, J&J has been the top earner within the pharmaceutical space for almost a decade. What's remarkable about this streak is that J&J has had to overcome numerous patent expirations over this period in order to maintain its top spot, among them the loss of exclusivity for the mega-blockbuster anti-inflammatory drug Remicade.
All told, there simply aren't many stocks that can compete with J&J from a safety standpoint.
The future of surgery is robotic
Taylor Carmichael (Intuitive Surgical): Intuitive Surgical doesn't scream "safe" because it's still priced like a growth stock. It trades at 60 times earnings. That's expensive, and in the short term, that earnings multiple might take a hit in a bear market.
Let me flip the script a little bit and point out how dangerous it can be to buy a stock on the grounds that it is cheap. It can be wonderful to snag shares of an amazing company when they are bargain-priced -- like Shopify (SHOP -2.37%) at the moment, for example. But typically, the stock market is fairly rational over the longer term. As such, for the most part, the companies that sport cheap multiples are the weaker ones. Strong companies are going to be expensive.
Intuitive Surgical is not just a strong company in the healthcare field, but the strongest one I know. It's the dominant franchise in robotic surgery, and the growth of that medical niche is a story that will play out over the rest of my investing life. Robotic manipulators are more precise than human hands. That's it -- that's the thesis. Fully human-guided surgery will give way to robot-assisted surgery.
Intuitive doesn't just have powerful mindshare -- it has a wide moat that keeps competitors at bay. Thousands of hospitals have already bought surgical robots from Intuitive. The company placed an additional 1,347 da Vinci robots in 2021, bringing the total number installed around the world to over 6,700. More than 1.5 million surgeries were performed with those systems last year.
What makes this stock so powerful is that Intuitive doesn't just make money on the sales of its core da Vinci hardware. During each surgery, these robotic systems use an array of disposable tools made specially for these machines by Intuitive -- from needles and staples to cutting tools. These need to be regularly replaced, making the sale of each robot the headwaters of a river of recurring revenue. While I don't know how this stock will do in 2022, it's the safest bet in healthcare that I can think of to outperform over the next several decades.
