The global economy has slowed down remarkably lately, primarily due to the aggressive interest-rate hikes implemented by central banks in an effort to restore inflation to normal levels. As a result, the risk of an upcoming recession has significantly increased.
Most healthcare stocks are resilient to recessions, as consumers do not reduce their health expenses even under adverse economic conditions.
Here we will discuss the prospects of three healthcare stocks that offer above-average dividend yields and have decent growth prospects.
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Attractive Valuation and a Key Advantage
GSK plc (GSK) , formerly GlaxoSmithKline, headquartered in the United Kingdom, develops, manufactures and markets healthcare products in the areas of pharmaceuticals, vaccines and consumer products. Its pharmaceutical offerings are related to the following disease categories: central nervous system, cardiovascular, respiratory and immune-inflation.
GSK has a key competitive advantage, namely its focus on research and development. The company invests heavily on research and development. In 2022, it spent nearly 13% of its revenues on research and development.
On the other hand, GSK has exhibited a volatile performance record, primarily due to some patent expirations and wide fluctuations in currency exchange rates. For instance, the expiration of the patent of Advair in 2019 took its toll on the results of the company in the following two years. Overall, GlaxoSmithKline has grown its earnings per share by only 0.9% per year on average over the last nine years.
On the other hand, the other respiratory products of GSK are showing strong growth rates. The company also has several vaccines, which are experiencing high sales growth. As a result, GSK is likely to enhance its growth rate in the upcoming years.
Notably, the stock is currently trading at a nearly 10-year low price-to-earnings ratio of 8.3, which is much lower than the historical average of 13.0 of the stock. The cheap valuation has resulted from somewhat lackluster growth prospects in the short run and the impact of inflation on the valuation of the stock, as high inflation reduces the present value of future earnings.
However, the Fed has prioritized restoring inflation to its long-term target of 2%. Thanks to its aggressive interest rate hikes, inflation has declined every month since it peaked last summer. It is thus reasonable to expect the Fed to accomplish its goal sooner or later. When inflation subsides to normal levels, the stock of GSK is likely to enjoy a strong valuation tailwind.
It is also worth noting that the stock is offering a 4%-plus dividend yield. The company has a healthy payout ratio of 42% and a strong balance sheet, with a solid interest coverage ratio of 9.3. Given also the resilience of GSK to recessions, its dividend should be considered safe for the foreseeable future. The only caveat for U.S. investors is the sensitivity of the dividend to the exchange rate between the GBP and the USD.
Short History, Large Prospects
Organon & Co. (OGN) was spun off from Merck (MRK) in June-2021. Organon is a pharmaceutical company that develops and markets health solutions in a variety of areas. Its established brands portfolio consists of nearly 50 products that have lost patent exclusivity and are used for treatment in the areas of cardiovascular, respiratory and dermatology and non-opioid pain management. The women’s health portfolio of Organon includes fertility and contraception brands, such as Nexplanon/Implanon and NuvaRing.
The company also has a small portfolio of biosimilar drugs, which are used in immunology and oncology. The spinoff has transferred 15% of revenue, 25% of manufacturing sites and 50% of products from Merck to Organon.
Organon has some significant growth drivers in place. The established brands that previously belonged to Merck should provide Organon with strong free cash flows, as the off-patent products do not require high research and development expenses.
In addition, the women’s healthcare business has long been a pioneer in its field since its foundation in 1923. The company produced the first-ever hormonal oral contraceptive as well the first-ever lower dose estrogen combined oral contraceptive. More recently, Organon developed the first once-a-month contraceptive ring.
Biosimilar drugs comprise just a small portion of the revenues of Organon but the company is trying to expand this segment. Organon will launch a biosimilar to Humira, a blockbuster drug, in the U.S. this year. Given the excessive sales of Humira over the last decade, the biosimilar drug of Organon may prove a material growth driver for the company in the upcoming years.
Moreover, Organon is currently offering a 4.6% dividend yield, with a solid payout ratio of 26%. As the company has a strong balance sheet, with an interest coverage ratio of 4.1, the dividend is safe for the foreseeable future.
It is also important to note that the stock is trading at a price-to-earnings ratio of only 5.5. The cheap valuation has resulted primarily from the short history of the spun-off company. If Organon proves that it can stabilize or grow its earnings, its stock will almost certainly earn a much higher valuation multiple.
27 Years of Dividend Increases
Sanofi (SNY) , a global pharmaceutical leader, was founded in 1994 and is based in France. The company, with a market capitalization of $119 billion, develops and markets a variety of therapeutic treatments and vaccines. Pharmaceuticals account for 72% of sales, vaccines comprise 15% of sales and consumer healthcare contributes the remainder of sales. It generates a third of its sales in the U.S., a little more than a quarter of its sales in Western Europe and the remainder of its sales in emerging markets.
The specialty care division of Sanofi, especially in the areas of rare disease and immunology, have demonstrated high rates of growth. Several of these products, such as Dupixent, are just starting to gain traction. As a result, these products are likely to remain major growth drivers for many more years.
Sanofi has also fueled growth via significant acquisitions. Moreover, as the products of the company are used to treat diseases, the demand for them remains firm even during rough economic periods. This is an important factor to consider, especially given the increasing risk of an upcoming recession.
Sanofi has exhibited a somewhat volatile but decent performance record. During the last nine years, the company has grown its earnings per share by 7.4% per year on average. Given the promising growth prospects of some of its products, Sanofi is likely to continue growing its EPS at a mid-single-digit rate in the upcoming years.
Sanofi has raised its dividend for 27 consecutive years in its local currency. U.S. investors are likely to experience fluctuations in dividends due to currency fluctuations but the dividend of Sanofi is certainly attractive. Sanofi is currently offering a 4% dividend yield, which is in line with the historical average yield of the stock. Thanks to its healthy payout ratio of 44% and its rock-solid balance sheet, which is nearly debt-free, the company is likely to keep raising its dividend for many more years.
It is also worth noting that Sanofi is trading at a nearly 10-year low price-to-earnings ratio of 10.7. This is much lower than our assumed fair earnings multiple of 16.0, which is in line with the historical valuation of the stock and the valuation of its peers. Whenever the stock reverts to its normal valuation level, it will highly reward investors.
Final Thoughts
Recessions are inevitable every few years and hence income-oriented investors should always try to identify stocks that are resilient to recessions. This is especially true in the current investing environment, in which the risk of a recession has significantly increased due to the unprecedented interest-rate hikes implemented by central banks.
The above three names are fairly resilient to recessions, have decent growth prospects and are offering above-average dividend yields, with a wide margin of safety.
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