The Healthcare Dogs of the Dow

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Every once in a while I like to look at the "Dogs of the Dow" to see how they're faring.  It just piques my interest to see how well a strategy based on nothing more than a company's dividend yield is performing.  The history of the "Dogs" is impressive, of course - an average yield of more than 14% growth compared to the Dow's 11%-plus, over the past 40 years - but it has had some bad years.  For 2012, the "Dogs" provided a yield of 5.71%, compared to the DJIA's overall growth of 7.3% (and a straight play of the Dow Jones' 30 Industrials having a yield of 11%).  As it turns out, some "Dogs" can sit pretty (General Electric up 17.2%), while other "Dogs" just roll over and play dead (Intel Corporation down 15%). 

At the same time, some "non-Dogs of the Dow" just plain put the Dogs to shame: Bank of America saw an increase in value of nearly 109%, at $11.61, up from $5.56.

There aren't many changes to the "Dogs" for 2013, and three dogs carry over that represent the healthcare sector: Johnson & Johnson (NYSE: JNJ), Merck (NYSE: MRK) and Pfizer (NYSE: PFE).  In 2012, these three companies presented compelling yields and growth.

(Pfizer alone gained 15.9% for the year, hopefully putting to rest fears that its loss of exclusivity over Lipitor would result in serious financial pain - in fact, they have increased their dividend 9%, to $.96/year up from $.88/year.  You can't keep a good dog down.)

Question: why bother dividing your investment dollars up among 10 companies, a few of which are likely to be losers, when you can isolate a smaller group of companies that have the potential for more substantive gains - especially when that small group of companies offers a nice set of dividend yields (Pfizer - 3.7%, Merck - 4.1%, Johnson & Johnson - 3.4%)? 

  Pfizer Merck J & J
Cap $191.1 B $127.6 B $198.3 B
Quick Ratio 1.50 1.70 1.30
Long-Term Debt/Equity 0.38 0.32 0.18
Debt/Equity 0.48 0.35 0.26
Earnings/Share $1.29 $2.19 $3.05
Sales/Share $8.31 $15.73 $23.79
Book Value/Share $11.09 $18.34 $23.01
Cash Flow/Share $2.42 $4.58 $4.32
Return on Equity 11.90 12.10 13.30
Return on Assets 5.30 6.40 7.10
Return on Investment 8.60 9.20 11.30
EBIT Margin 22.5% 20.3% 17.60%

 

I must confess to having great affection for companies that have a debt-equity ratio of less than 1 - and even more affection when the Quick Ratio is greater than 1. 

Financially, these companies seem fit.  With respect to the valuations per share, I think we see some of the weakness Pfizer has realized from the loss of exclusivity to Lipitor, and perhaps some effects of its decisions to divest itself of some peripheral business and focus more exclusively on drug development.  However, Pfizer's EBIT margin, compared to those of Merck and Johnson & Johnson, speaks to the company's overall health quite favorably.

The strength and sustainability of a pharmaceutical firm is dependent upon its pipeline - not just the drugs it has available at present, but what it will have in two, five and even ten years down the road. 

Because of its business activities in the healthcare product market and the medical equipment and diagnostics market, Johnson & Johnson may be less reliant upon its drug pipeline than Merck or Pfizer, but it does have a very healthy line of more than 25 drugs currently on market.

Merck currently has more than 50 drugs that are currently available by prescription.  In addition to these, their pipeline also has 35 drugs in Phase II, Phase III or Review stages of development. 

In addition to more than 100 prescription and over-the-counter drugs it has available, Pfizer has more than 70 drugs in its pipeline, including Phase I, Phase II, Phase III drugs, and more than a dozen drugs that are currently in registration.  Among these latter is tofacitinib - a pain reliever for Rheumatoid Arthritis that is already being touted as Pfizer's new "Lipitor."

These three companies may constitute the healthiest dogs among the Dogs of the Dow.  And a healthy dog is a happy dog.

 


josephpporter owns shares of Pfizer, Inc.. The Motley Fool recommends Intel Corp and Johnson & Johnson. The Motley Fool owns shares of Bank of America Corp, General Electric Company, Intel Corp, and Johnson & Johnson. 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!

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