Progress is a slow process, and so is accumulating wealth in the stock market. Investing in equities isn't a get-rich scheme, but in the long run, patience pays off. Or at least it does for those investors who pick the right stocks.
There are many options. For those who need some inspiration, here are two top companies to look into that could be excellent, long-term picks: Pfizer (PFE -3.85%) and Medtronic (MDT -1.41%). What makes these healthcare giants worth holding onto for a long time? Read on to find out.
1. Pfizer
Pfizer has been a laggard in the market all year long partly due to the fear that demand for its COVID-19 products will drop soon, leading to lower revenue for the drugmaker. Pfizer's regulatory headwinds surrounding immunosuppressant Xeljanz are exacerbating these worries. But in my view, that's a fairly short-sighted look at the company's business.
Pfizer's coronavirus sales might indeed decrease, but thanks to its coronavirus drug Paxlovid and its vaccine Comirnaty, the pharma giant has delivered blowout financial results and substantially grown its free cash flow, giving it the flexibility it needs to acquire promising pipeline candidates or smaller pharmaceutical companies.
PFE Free Cash Flow data by YCharts.
Pfizer has been active in the mergers and acquisition scene recently, and it does not plan on stopping. Enhancing its pipeline should allow Pfizer to deliver key regulatory wins eventually, thereby helping it strengthen its portfolio, increase its revenue beyond the COVID-19 pandemic, and handle challenges to its lineup, such as those affecting Xeljanz, and of course, patent cliffs.
Pfizer has more than 90 ongoing programs. There are 28 in phase 3 studies. Several of these are new clinical compounds that have never earned regulatory approvals in the U.S. For instance, Pfizer is developing etrasimod as a potential treatment for ulcerative colitis and other immuno-inflammatory illnesses, while elranatamab is targeting multiple myeloma in a late-stage study.
Further, Pfizer can use its cash to reward shareholders with dividend increases. Stable dividends can help decrease losses in a market downturn and contribute substantially to the total return of stocks over the long run for those who opt for automatic dividend reinvestment. According to some estimates, between 1960 and 2021, about 84% of the total return of the S&P 500 is due to reinvested dividends and the power of compounding.
Pfizer offers a yield of 3.25%, which is substantially higher than the S&P 500 average of 1.69%, along with a modest cash payout ratio of 31%. (Anything under 60% is typically considered "good.") That gives the company plenty of room for payout increases in the future. Lifesaving therapies will always be in high demand. Given Pfizer's long-standing leadership in this area and the opportunities it is grabbing onto, the company looks like a top pick to buy.
2. Medtronic
Medical devices giant Medtronic has faced several issues over the past few years. First, the COVID-19 pandemic and government-imposed lockdowns decreased foot traffic in healthcare facilities, leading to a drop in surgical procedures and harming sales of various products it offers physicians to help perform these procedures.
Second, economic-related problems such as inflation contributed to a rise in Medtronic's expenses, a challenge the company will have to deal with for at least a few more quarters. These problems are temporary, though, and Medtronic has a lot going its way. Consider the dozens of medical devices it offers through four main segments: diabetes, medical surgical, cardiovascular, and neuroscience.
Brand name matters. Medtronic, which is based in Dublin, Ireland, has built a solid reputation as a leading medical equipment producer that helps save patients' lives. Physicians will, no doubt, continue to gravitate toward companies like Medtronic with a solid reputation.
Also, developing many products in this area is capital intensive and requires abiding by stringent regulations. That's why even putting Medtronic's industry expertise aside, it is difficult for newcomers to challenge the established major payers in the market. That's good for Medtronic in the long run.
The company typically reports stable revenue and profits, and offers reliable dividends. During its fiscal 2022, which ended on April 29, the company's top line grew by 5.2% year over year to $31.7 billion. Medtronic's earnings per share increased by about 40.2% to $3.73. The healthcare giant has increased its dividends 45 years in a row, making it a Dividend Aristocrat. The stock currently offers a yield of 2.87% and a cash payout ratio of 57%.
Moreover, Medtronic isn't sitting on its hands. The company routinely develops new products. It earned more than 200 approvals and conducted more than 300 clinical trials during its fiscal 2022. The company should continue to profit from the lucrative and expanding healthcare sector.
Medtronic's efforts in the robotic-assisted surgery market look particularly promising thanks to its Hugo system. Medtronic's entrenched position in its indispensable industry, and stable revenue and earnings make a strong case for the stock's long-term prospects.
