These Healthcare Stocks Pay Fast-Growing Dividends
Aubrey is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Given the huge potential of the healthcare industry, it is very tempting to peer through it for possible options if one seeks for the best places to earn dividend income. These stocks pay some of the fastest-growing dividends. I say, it is the best time to take advantage of the immense possibilities in this sector.
Health insurance leader
With 13.6% of the market share in health insurance, UnitedHealth Group (NYSE: UNH) is the largest of all healthcare providers in the U.S. The bulk of the company’s business is its Medicare, a flourishing industry in a nation where quality healthcare and longer life are expected by its citizens. UnitedHealth takes its dividend paying ability from its $80 billion annual revenues. This stock has doubled its dividend payout within the past two years. The rally in its payout started in 2010 when the company decided to pay quarterly dividends instead of just annual. During this time, the dividend swelled by 1,250%. In 2011, the annualized dividend continued to grow by 51%, and in 2012, by 30.6%. In 2012, the company’s payout ratio based on cash flow is at a healthy level of 11.45%.
United’s core operations continue to improve; its net operating cash flow has been stably rising, albeit, on a slower rate in 2012. In the first quarter of 2013, its revenue grew by 11.21% year-on-year, way faster than that for the same period in the past year. Likewise, it sits on a huge pile of cash; its free cash flow keeps on growing. Given this stable and improving financial position, the health insurance leader is expected to have the ability to sustain growth in its payout. One should also note its low P/E ratio (ttm) of 12.20, which is lower than the industry's 13.80. It has a forward ratio of 10.79, and PEG ratio of only 1.11. This lower pricing level is attractive for one with a double-digit revenue growth on a quarterly basis and with EPS that is expected to grow on a double-digit in the next 5 years.
Wellpoint’s High Potential Value
A company that comes next to UnitedHealth in terms of market share is WellPoint (NYSE: WLP). It has an 8.34% share in the market and rakes in over $56 billion in annual revenue. Wellpoint has 54 million policyholders. In terms of dividends, it just increased its quarterly payout by 30%, from only $0.2875 to $0.375 per share. The annualized payment went up by 15% in 2012. The company’s pile of cash has remained positive although it declined by about 27% in 2012. During this time, its net operating cash flow went down by about 19%.
The growth has been better lately nonetheless. Its quarterly revenue for the first quarter of 2013 grew by 14.7% year-on-year. This is a remarkable improvement from its 3.5% growth during the same period last year. In fact, the quarterly revenue growth in the end of all 4 quarters last year compiled by Ycharts.com did not even reach 4%. But the company has picked up since then. Likewise, its profit margin remains stable with respect to its performance in recent years. The payout ratio is also at a decent level of 13.4%. WellPoint currently has a low valuation; its P/E ratio is at 8.94 in contrast to the industry's 13.80, and its PEG is only 0.78. Thus, the room for appreciation in share price is undeniable. The company has also recently received bullish sentiment from investors given its strong buyback activity.
Medtronic's Strong Dividend Growth
One of the healthcare companies that can promise huge dividend growth is medical appliances and equipment maker Medtronic (NYSE: MDT). This company has increased its annualized dividend payment by an average rate of over 29% in the past 3 years. It had significantly cut its payout in 2009 by 26% but had bounced back with a vengeance in 2010, increasing its payout by roughly 44%. This robust dividend growth continued to transpire up to the latest quarter. Meanwhile, Medtronic continues to grow in revenues albeit, at a slow pace of 2.78% in the first quarter of 2013. In comparison, the revenue growth in the same period last year was only 1.58%. Nevertheless, the company makes up for this through its high margins; its net profit margin for that quarter ending in January31, 2013 was 24.5%.
But is the current dividend safe? To answer this question, one needs to look at the performance of its core business and the payout ratio. Medtronic's net operating cash flow swelled by 19.5% in 2012 while its free cash flow grew by an impressive 30.8%. At a payout ratio based on cash flow of 22.8%, I believe the company will be able to sustain a strong growth in dividends in the near future.
One of the possible key sources of growth for the device maker in the future is its renal denervation system, a minimally invasive therapy for people suffering from high blood pressure. Currently, it is available in some parts of Europe, Asia, Australia, the Americas, and Africa. It is available in the U.S. only for investigation purposes. If and when Medtronic gets U.S. approval, this will mean a lot for this renal denervation front-runner. Medtronic has a P/E ratio of 15.14, significantly lower than the industry's 27.10. This pricing is relatively low given its growth potential. It has earned more upward than downward revisions in its EPS for end of the current fiscal year.
With the population getting older by the day, the healthcare industry is a solid investment option. And staying with market leaders like UnitedHealth, WellPoint, and Medtronic is the best strategy one can make. Their appeal stems from their relatively low price in comparison with their respective industries, the undeniable growth potential, and attractive dividend performances.
(Data sources: nasdaq.com, marketwatch.com, finviz.com and ycharts.com; Data retrieved May 11, 2013, PE ratios updated June 9,2013)
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Aubrey Tabuga has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group and WellPoint. The Motley Fool owns shares of Medtronic and WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!