If size were directly correlated with stock market performance, CVS Health (CVS -0.22%) and Johnson & Johnson (JNJ -0.46%) would always perform well as they are among the largest healthcare stocks in the U.S. However, both corporations have faced company-specific issues that have held them back, and as of this writing, they aren't that far off from their 52-week lows.
Despite their struggles, CVS Health and Johnson & Johnson have some major redeeming qualities, especially for income-seeking and long-term investors. Let's find out why these healthcare stocks are still worth buying and holding forever.
1. CVS Health
CVS Health is one of the most prominent and recognizable pharmacy chains in the U.S. However, the company has faced some issues this year, especially as it continues to disappoint investors by revising its guidance downward. In the third quarter, CVS announced that it now expects earnings per share (EPS) for its fiscal 2023 to come in between $6.37 and $6.61, down from its previous projection of the range of $6.53 to $6.75.
The healthcare giant had pulled a similar move in the first quarter, prompting the market to react negatively. The same thing happened this time around. CVS blamed costs related to recent acquisitions for the reduced guidance in the third quarter. While not ideal, this isn't a problem that will plague CVS regularly. Moreover, the company's recent acquisitions added depth and breadth to its healthcare offerings.
CVS Health is now in the home care business thanks to its acquisitions of Signify Health as well as Oak Street Health, which strengthened its position in primary care. Of course, it remains a leader in health insurance through its subsidiary Aetna. CVS Health's comprehensive healthcare business, coupled with the name recognition it has built over the years, is a significant strength. Trust matters in business, especially when it comes to lifesaving products such as prescription medicines.
And millions of patients have been refilling their prescriptions at CVS for decades. That won't change anytime soon. And as healthcare spending rises due to the aging population, CVS should benefit. The company has generally recorded solid financial results over time.
CVS Revenue (Quarterly) data by YCharts
The stock's dividend profile also looks solid, offering a yield of 3.58% and a cash payout ratio of 27.2%. That gives CVS Health plenty of room to raise its dividends, which is precisely what it has done in recent years. The company's payouts are up by 120% in the past decade.
Though CVS Health has faced some issues this year, the company's entrenched position in healthcare, the diversity of its operations, historically consistent financial results, and the sector's growth prospects make the stock an excellent pick for buy-and-hold investors.
2. Johnson & Johnson
Johnson & Johnson's mounting legal issues have caught up with the company again, at least somewhat. The recently passed Inflation Reduction Act could negatively impact sales of some of its products, while it has yet to put the thousands of lawsuits related to its talc-based products to rest. It's essential for investors to monitor these issues, but if any company can handle them and remain strong, it is Johnson & Johnson.
After all, despite these problems, the healthcare juggernaut still has an AAA rating from Standard & Poor's, a stronger rating than even the U.S. government and one of the rare corporations with this high honor. Further, the company is a Dividend King and has raised its payouts for 61 consecutive years, another piece of evidence in favor of the company's longevity and operational strength.
Johnson & Johnson has done so while surviving very different economic and market challenges, a rather impressive feat. In the past 10 years, J&J's financial results have generally been consistent as well.
JNJ Revenue (Quarterly) data by YCharts
What does the future hold for the company? Johnson & Johnson recently spun off its consumer health business, deciding to focus its efforts on its core pharmaceutical and medical devices unit, both of which generally had stronger sales growth numbers. The move should allow the company to improve its financial results over time, especially as it pours more money into R&D for its two key remaining segments.
Johnson & Johnson has an incredibly deep pipeline in pharmaceuticals that boasts about 100 programs. In medtech, the company recently announced that it would start clinical trials for its robotic-assisted surgery device, Ottava, in late 2024 in the U.S. This could be a lucrative long-term opportunity for the company.
The stock currently yields 3.23%, and while its payout ratio seems a little high at 75%, the company has worked too hard to build its streak of dividend increases and is unlikely to stop rewarding shareholders with further dividend hikes.
Johnson & Johnson might not be the most exciting company around, but its stable operations make it a solid buy for those in the market for blue-chip dividend stocks worth holding on to for good.
