Higher interest rates and plunging growth forecasts have been the economic fallout from inflation that has been elevated throughout some of 2021, all of 2022, and all this year so far. Given the probability that the U.S. will face a recession in the next 12 months, investors would be wise to consider prepping their portfolios for an economic downturn.
Some sectors are more reliable than others in times of economic uncertainty. Given the essential nature of the goods and services provided by the healthcare sector, it is arguably one of the more durable economic sectors. And these two healthcare picks could be savvy buys for investors now, regardless of when tougher economic conditions again materialize.
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1. Pfizer: A world-class drugmaker
Pfizer (PFE 0.55%) is probably best known today for its COVID-19 vaccine, Comirnaty, which it co-owns with BioNTech, and the COVID-19 antiviral treatment Paxlovid. Both have far exceeded the $1 billion annual sales threshold to be classified as blockbusters.
But with eight other blockbuster products in 2022, Pfizer is a well-balanced pharmaceutical company. While it expects a double-digit percentage drop-off in revenue in 2023 as demand wanes for its COVID-19 products, it should return to growth soon. This is because Pfizer has more than 100 candidates in its pipeline, including the immunology medicine etrasimod and a respiratory syncytial virus vaccine.
Along with promising growth prospects, it also offers a dividend that yields 4.3% at the current share price -- far higher than the S&P 500 index's average yield of 1.7%. And its dividend payout ratio is expected to come in under 49% in 2023, so management will have room to boost the distribution.
Pfizer shares trade today at a forward price-to-earnings ratio of 10.4, which is considerably lower than the drug manufacturer industry's average ratio of 13.4. This is why it still looks to be a buy despite falling sales of its COVID-19 products.
2. Elevance Health: A quickly growing health insurer
Serving over 118 million customers through its Anthem and Wellpoint health plans and Carelon healthcare services company, Elevance Health (ELV -0.45%) is a major health insurer.
And with the climbing rates of chronic diseases and a growing awareness regarding the importance of health insurance, the company finds itself in an enviable position. Market research firm Precedence Research anticipates that the global health insurance market will grow from $1.9 trillion in 2021 to $3.9 trillion by 2030.
That growth is expected to contribute to organic growth for Elevance Health. Factoring in the expectation that it will also make bolt-on acquisitions, analysts believe that the company's earnings will rise at an annualized rate of 12.3% over the next five years -- marginally above the 12% annualized earnings growth forecast for the healthcare plans industry.
Elevance Health's 1.3% dividend yield may not seem like much. But since its dividend payout ratio is on track to come in at around 18% in 2023, the company is in position to deliver above-average payout growth, which would compensate for its lower starting yield.
The stock's forward price-to-earnings ratio of 12.4 is slightly less than the healthcare plans industry average ratio of 13.2. That combination of superior growth potential and a cheaper valuation makes the stock a convincing buy for dividend growth investors.
