The healthcare sector is a highly competitive, highly regulated, and technically complex industry. Which is why most investors should probably stick to the industry's largest companies.
With a market capitalization of $120 billion, Medtronic (MDT +0.67%) is one of the largest medical device makers in the world. With a market cap of $145 billion, Pfizer (PFE 0.02%) is one of the largest pharmaceutical companies on the planet.
Both are worth buying in November, but for very different reasons.
Size matters in the healthcare sector
Small companies can be highly innovative. They can be built around exciting new technologies. And they can be swallowed up like minnows by the big fish within an industry. That's notable in the healthcare sector because mergers and acquisitions are a common occurrence, with large companies effectively acquiring the new developments made by smaller peers.
Image source: Getty Images.
However, there's more to the story than just the new developments. That's because the regulatory burden in the healthcare sector is so high. Huge amounts of money are required to demonstrate the effectiveness of new treatments and to obtain regulatory approval. It can also take years to go through the development and approval process. Often, smaller companies lack the resources to handle the task, and they intentionally seek to sell themselves to the highest bidder.
Even after regulatory approval, there are huge spending needs as a product is marketed. Industry giants have the necessary connections and the financial resources to bring an exciting new product to market. Smaller companies often lack the scale and financial strength to do that. Again, it isn't uncommon for a company with a niche product to sell out to a larger, more diversified business.
Two industry giants that investors may want to consider as November draws to a close are medical device maker Medtronic and pharmaceutical maker Pfizer.
Medtronic is for dividend lovers
Medtronic's roughly 3% dividend yield is near the highest levels in the company's history. The dividend has been increased for 48 consecutive years, which is just two years shy of the 50 needed to be crowned a Dividend King. The dividend payout ratio is approximately 80%, which is relatively high but not excessive. If you are a dividend investor, you'll probably want to take a closer look at this stock.
NYSE: MDT
Key Data Points
The key reason is that this industry giant has been consolidating its operations in an effort to improve its profitability. The next big move will come in early 2026, when it spins off its diabetes division. That will cap a multi-year effort to reposition the business for growth.
Notably, the company's leaner structure will make new products, notably including the Hugo surgical robot, more impactful to future performance as they are rolled out across the company's massive customer base. This out-of-favor medical device giant is a solid buy for dividend investors who think long term.
Pfizer is for turnaround investors
Despite Pfizer's lofty 6.7% dividend yield, it is probably best viewed as a turnaround stock. That's because the dividend payout ratio is 100% at the same time that management is making a large acquisition. That acquisition keys into the ability of giant companies to buy up smaller peers. In this case, Pfizer is buying Metsera to gain access to Metsera's obesity drug pipelines. The deal proves that the board of directors will do what's necessary to ensure that Pfizer remains an industry leader.
NYSE: PFE
Key Data Points
The problem is that the board cut the dividend when Pfizer bought Wyeth in 2009. Making hard decisions around acquisitions can also mean making hard decisions around other aspects of the business, like the dividend. However, from a business perspective, Pfizer is taking the right approach to address upcoming drug patent expirations, which will be an earnings headwind.
As investments like Metsera pan out, investors are likely to get more comfortable with Pfizer's stock. If you buy now, you'll get in before Wall Street realizes that Pfizer is, once again, positioning itself for long-term success. If the dividend isn't cut, consider that icing on the cake.
Two ways to go in the healthcare sector
If you are building an income portfolio that you want filled with boring but reliable stocks, Medtronic could be worth buying hand over fist in November. If you are a turnaround lover, a more aggressive style of investment like Pfizer could be the stock for you. Both of these giants, however, have proven they have what it takes not only to grow large but also to utilize that size to their advantage over time.
