Now's a great time to be a value-conscious investor. There's a sale on some underappreciated dividend stocks that have been beaten down in recent weeks.
Over the past year, these three healthcare businesses combined generated more than $22 billion in free cash flow. Moreover, they're not at all shy about sharing their profits with investors in the form of share buybacks and rapidly rising dividend payouts.
Image source: Getty Images.
Here's how they could make excellent, long-term additions to just about any income-seeking investor's portfolio.
CVS Health
CVS Health (CVS +1.84%) is famous for its retail pharmacies, but it's actually a vertically integrated healthcare conglomerate that leverages its retail footprint to fuel the growth of related businesses.
The stock's been beaten down about 22% in 2023, partly because one of its most successful vertical integrations, its pharmacy benefits management (PBM) business, could be in trouble. At recent prices, the stock offers a juicy 3.7% dividend yield.
NYSE: CVS
Key Data Points
Health plan sponsors hire PBMs to decide which prescription drugs plan members can access without incurring additional costs. With 110 million members at the end of June, CVS Health's PBM is the country's largest, which allows it to negotiate for huge rebates from drugmakers that want preferred positioning on its formulary. Unfortunately for CVS Health's investors, plan sponsors seem fed up with PBMs that don't share as much of those rebates as they would like.
Last year, Centene ended its contract with CVS Health in favor of Cigna's PBM. In August, Blue Shield of California brought in Mark Cuban's Cost Plus Drugs, Amazon, and others to jointly handle most of its members' pharmacy benefits while relegating CVS Health to just specialty pharma services.
More companies following in Blue Shield's lead could spell trouble in the short term. However, the market appears to be undervaluing the long-run potential for Aetna, CVS Health's benefits management business. Recent acquisitions of Signify Health and Oak Tree Health make it a leading employer of American healthcare practitioners. An ability to send an increasing number of patients to service providers it employs directly is a big advantage that should keep profits rolling in.
Medtronic
If you'd like to invest in a more straightforward business than CVS Health, consider Medtronic (MDT 2.11%). It's the largest company in the world that's focused on developing and manufacturing medical devices.
NYSE: MDT
Key Data Points
Medtronic shares have fallen around 7.1% over the past month despite an encouraging fiscal first-quarter earnings report. At its beaten-down price, the stock offers a 3.4% dividend yield, and its dividend-raising track record is hard to beat. It's raised its payout every year since 1977 at an average rate of 16% annually.
Medtronic recently impressed Wall Street analysts with a strong start to its fiscal 2024, which ends next January. Many of the devices Medtronic sells, such as spinal cord stimulators for chronic pain or leadless pacemakers for abnormal heartbeats, require lots of doctor visits that eventually culminate in a surgical procedure.
COVID-19 left a lasting impression on Medtronic that is finally lifting. During the fiscal fourth quarter that ended on July 28, recovering procedure volume pushed total sales 6% higher year over year.
Returning to business as usual allowed adjusted earnings to rise 6% year over year to $1.20 per share in the fiscal first quarter. This is a lot more than the company needs to cover its dividend payout, which is currently set at just $0.69 per share.
The company generated $4.4 billion in free cash flow over the past 12 months and a long-awaited return to business as usual will help push profits higher. With a commitment to returning at least half of free cash flow to shareholders, buying the stock now to hold for the long run makes a lot of sense.
