Three Stocks Set to Benefit From Changing Healthcare Dynamics
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The healthcare industry is changing quickly because of demographic shifts and the impact of Obamacare. Two niche providers that look well positioned are Universal Health Services (NYSE: UHS) and Capital Senior Living (NYSE: CSU). A hedged bet on the aging process is Service Corp. International (NYSE: SCI).
BlackRock Health Sciences Trust (NYSE: BME) is a closed-end fund that invests in the healthcare sector, generating income by writing covered calls. It's an interesting investment option for those looking for broad industry exposure and a decent yield. It has a static quarterly dividend payment of $0.384 per share, but also pays an annual distribution based on performance. Last year the annual dividend was $0.85 a share.
Based on the regular quarterly distribution, the closed-end fund yields around 5.1%. I recently took a look at the fund's semi-annual report. Although a little sparse, two healthcare facility operators were highlighted and are interesting investment candidates.
Not your typical hospital
Universal Health Services owns acute care hospitals and psychiatric facilities. While revenues are split about 50/50 between the two, the psychiatric hospitals accounted for almost 75% of earnings before interest, taxes, depreciation, and amortization.
At the start of 2013, the company ran 23 acute care hospitals and 197 behavioral health facilities in 37 states. The future for acute care is reasonably obvious: as the baby boom generation ages healthcare demand is going to increase. What's less obvious is the behavioral health business' prospects.
Mental Health is big business
Management estimates 73 million people have diagnosable mental illnesses and that 4 of the 10 leading causes of disability relate to mental illness. It's expecting stable pricing and increasing admissions, which should boost performance over the long term. The division has “minimal exposure to uncompensated care” and the facilities have lower capital requirements than hospitals, which improves margins.
Revenues fell 5% last year, but have been on a generally upward climb over the past decade. Earnings, meanwhile, increased from around $4 a share to about $4.50 year over year. With the expected growth in demand for healthcare and the solid outlook for psychiatric care, organic growth should be slow and steady. Acquisitions will support higher growth rates. Look for Universal Health Services to prosper over the long term.
Housing the Boomers
Capital Senior Living has around 100 senior living facilities in more than 20 states. About 50% of the company's business is independent living facilities, which are 100% private pay. Another 42% of the company's business is assisted living, which is mostly private pay. The high level of private payment insulates the company from changes in healthcare laws.
Although the company lost money in 2012, it is positioned for a bright future. The number of people 75 or older is set to grow materially in the coming years, and management expects the market to need 40,000 new housing units per year in the near-term. That will only increase over time as the baby boomers, which as a group are cresting over 65 now, reach 75.
It positions its facilities at the “value” end of the spectrum, which could be a good thing if the baby boomers are as poorly prepared for retirement as many industry watchers project. The company is small, but its revenues have grown steadily over the past decade. This could be a good way to invest in the aging of America for more aggressive types looking to sidestep Obamacare.
A hedged bet
Another holding in BlackRock Health Sciences Trust that caught my eye was Service Corp. International. It's not really a healthcare company, but it will benefit from an aging population. Service Corp. operates nearly 1,500 funeral service locations and over 370 cemeteries. It's something of a hedged bet, however, since the alternative to getting older is, well...
The funeral industry went through a period of over-expansion some time ago that left the business with a bad name. However, everyone will eventually need such services. Revenues tend to vary with the economy, as weak economic periods lead to reduced spending on death care services. However, the shear size of the baby boom generation should lead to solid demand growth in the future.
That will be offset somewhat by a trend toward cheaper cremations. However, Service Corp is working to increase the spending on services for this less expensive alternative. The bottom-line has grown in each of the last four years, and the company is again raising its dividend. Growth minded investors might want to add this name to their portfolios in addition to the companies that help the living.
A different angle on industry changes
Universal Health Services has a unique niche in the hospital sector. Capital Senior Living offers value in a market that is largely protected from health law changes. And Service Corp. International provides a service that we will all need someday and that is going to see increased demand from the aging of the baby boomers. All are solid options for investing in healthcare and avoiding the impact of Obamacare.
Obamacare will undoubtedly have far-reaching effects. The Motley Fool’s new free report, “Everything You Need to Know About Obamacare,” lets you know how your health insurance, your taxes, and your portfolio could be impacted. Click here to read more.
Reuben Brewer has a position in BlackRock Health Sciences Trust. The Motley Fool has no position in any of the stocks mentioned. 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!