Few sectors are as resilient in uncertain environments as healthcare. This is because medicines and health insurance are essential to the well-being of patients. Simply put, people need them. And given the expanding global geriatric population, there's reason to believe that these healthcare items will become even more indispensable over time.
Health insurer Elevance Health (ELV 0.52%) and pharmaceutical company Novartis (NYSE: NVS) are two dominant healthcare stocks to consider buying as a play on the inelasticity of the sector.
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1. Elevance Health
If you haven't heard of Elevance Health, that's because it used to be known as Anthem -- until rebranding under its new moniker in March. By either name, it's a sizable company with 47.1 million medical members and another 22.6 million who have signed up for life, disability, dental, vision, and Medicare Part D coverage.
For context, the company's $113 billion market capitalization makes it the second-largest pure-play health insurer behind UnitedHealth Group's (NYSE: UNH) market cap of $471 billion. And given the encouraging outlook of the global health insurance industry, this is one of the best industries in which a company could be an established leader.
That's because of the growing geriatric population, which requires a high degree of monitoring and medical care. Approximately 10% of the global population is over the age of 65, which is often classified as geriatric. This is a large part of why the global health insurance market could grow 4.6% annually from $2.8 trillion in 2020 to $3.9 trillion by 2027, according to market research firm Global Market Insights.
Elevance converted its $76.7 billion in first-half revenue into $3.5 billion in net income. This is equivalent to a 4.5% net margin, which demonstrates that the health insurer is a profitable business. That's why analysts believe Elevance will capitalize on the growing demand for health insurance with 11.9% annual earnings growth over the next five years. For context, that's just a little below the healthcare plans industry average annual earnings growth projection of 12.6%.
The company's 1.1% dividend yield is moderately lower than the S&P 500 index's 1.6% yield. But with the dividend payout ratio projected to come in below 18% in 2022, the health insurer's dividend growth should make up for its lower starting yield. This explains why I think that Elevance Health's dividend will grow at an annualized rate in the teens for the next five to 10 years.
Best of all, the health insurer can be purchased at a forward price-to-earnings (P/E) ratio of 14.8. This is slightly below the industry average of 16.1, which makes Elevance Health a compelling wealth compounder to buy.
2. Novartis
Due to an aging population and new drug launches to treat rare diseases, the global pharmaceutical industry is forecast to increase from $1.4 trillion in 2021 to $1.8 trillion in 2026. As one of the largest players in the world, Switzerland-based Novartis will no doubt benefit from this trend.
The company's portfolio consists of 13 drugs that are on track to generate at least $1 billion in sales for 2022. These include the immunology medicine Cosentyx and the heart failure medicine Entresto, which put up $2.4 billion and $2.2 billion in first-half sales with double-digit growth rates, respectively. This impressive drug portfolio is how analysts are anticipating $52.4 billion in revenue from Novartis for this year.
And with 150 projects currently in different stages of clinical development, the company's future appears to be promising. Future drug launches will more than offset the loss of revenue from upcoming patent expirations, which is why analysts are predicting 4.1% annual earnings growth through the next five years.
Novartis' 4.1% dividend yield is nearly triple the S&P 500 index's yield. With the forward payout ratio projected to come in just below 50%, the company should have no difficulty in raising its dividend further in the years to come.
And investors seeking passive income can snatch up shares of Novartis at a forward P/E ratio of 12.3, which is just above the industry average of 10.7 -- and hardly an unreasonable premium to pay for a world-class pharma stock such as Novartis.
