The stock market has rebounded after a disastrous 2022, with the S&P 500 up 15% so far this year -- such volatility in the stock market is unavoidable. Nevertheless, it's important to invest in growing businesses with solid fundamentals.
The healthcare sector is generally defensive by nature, meaning the majority of products and services from the various industries in the sector will always be in demand -- regardless of the state of the economy -- resulting in more stable revenue and profitability for these industries. That translates into greater resilience and outperformance for healthcare stocks during overall market volatility.
Over the long term, purchasing and holding healthcare stocks that are a part of fast-growing industries should be rewarding to investors.
Medical device makers Abbott Laboratories (ABT 0.63%) and Medtronic (MDT 0.62%) are two such businesses that could provide investors with a reliable source of income while they wait for their investments to grow in value.
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1. Abbott Laboratories
It is clear from Abbott's history of consistent dividend payouts that the company has a very stable business. For 50 years in a row, the pharmaceutical and medical devices company has consistently raised its dividends. In short, it has weathered all storms while maintaining revenue and profit growth.
ABT Revenue (Annual) data by YCharts. EPS = earnings per share.
It belongs to the exclusive group of Dividend Kings, a title awarded to businesses that have raised their dividends consistently for at least 50 years. Its 1.6% yield is slightly higher than the 1.7% average dividend yield of the S&P 500.
Due to a decrease in COVID-19 testing sales, when compared to the prior year, net sales fell by 11.4% year on year to $10 billion for its most recent second quarter. However, that does not reveal the full picture. Other business segments have been generally experiencing growth, most importantly in its medical devices segment. The market is pricing this secular growth apart from the company's COVID-19-related sales boost and the stock has mostly been flat this year. In my view, it shouldn't take long for Abbott to eventually make up for the drop in coronavirus tests.
Moreover, the medical device sector is promising and could reach $719 billion between 2022 and 2029, growing at a compound annual rate of 5.5%.
Abbott is now anticipating low double-digit organic sales growth for the year, thanks to recovering elective procedures. Importantly, sales of COVID-19 tests aren't included in the forecast.
Another good news is the company is investing more in research and development (R&D) in order to spur growth in upcoming years. In the first half of 2023, it invested $1.4 billion in R&D. It had $7.8 billion in cash and cash equivalents at the end of the quarter.
Knowing Abbott's track record, this could be a good time for investors with a longer term perspective to invest in a few shares before the stock takes off .
2. Medtronic
Medical-device player Medtronic manufactures products under four segments -- cardiovascular, medical-surgical, neuroscience, and diabetes -- that treat close to 70 medical conditions worldwide.
Despite the ups and downs in the healthcare sector, Medtronic has maintained its stride for years, increasing its revenue and earnings. Consequently, the company has raised dividends consistently for 46 years.
A significant number of products the company manufactures are used in procedures that are usually elective. These procedures took a hit amid the pandemic when they were either canceled or postponed, which affected Medtronic's top line.
However, management had faith that these challenges would subside, and they did. In 2023, Medtronic also adopted an "aggressive transformation" strategy to address the immediate issues and continue to promote growth. Recent financial 2024 first-quarter results demonstrate this. Its total revenue increased by 5.6% year over year to $8.5 billion during the quarter, and its earnings per share (EPS) rose by 3% to $1.57. Management attributed this performance to increased supply and the success of new products.
Medtronic expects fiscal 2024 to be a successful year, thanks to a strong start and a return to normalcy in the demand for elective procedures.
The company could also be soon one of the Dividend Kings. It has increased its dividend by 146% in the last decade. Its 3.3% dividend yield is significantly higher than the market average.
With its innovative and varied product line, Medtronic could prosper in the growing medical devices industry.
The company has more opportunities even in the robotic surgery market. Its robotic device, Hugo, has been performing well internationally. Management believes this surgical robotic should will drive growth in a market that hasn't been fully explored yet.
Medtronic also ended the quarter with a sturdy balance sheet that could fund new product development in the year. It had $1.3 billion in cash and cash equivalents and a long-term debt of $24 million.
