A health care prescription for Canadian portfolios
It makes sense to buy U.S. firms hard to find here, like three health care stocks from an advisory that also likes Canadian income stocks.
Few things stand in sharper contrast on the two sides of the 49th Parallel than health care.
The U.S. system may have gotten a little closer to Canada’s with the hard-fought passage of the health care reform bill in Congress.
But there’s still a world of difference. From an investor’s point of view, that creates some interesting opportunities.
With its massive population and largely private system, the U.S. has many more health care companies than Canada.
And if you’re putting American equities in your portfolio for diversity, it makes sense to pick the kind of stocks that are not easy to find on this side of the border.
Health care stocks are right at the head of that list.
The Complete Investor has three of them for us. All are in this U.S. advisory’s Income Portfolio. One is literally a household name, and the other two loom very large in the industry as well.
With health care reform on the books, writes Ms. Genia Turanova for the advisory, these stocks should benefit from “aging baby boomers and the developing world’s growing access to health care.”
But first we take the opportunity to review the Canadian stocks in this portfolio.
What Americans should look for
If Canadians should be looking for U.S. health care stocks, this advisory believes Americans should be looking for Canadian stocks in two industries — finances and resources.
Thus two of the stocks in this portfolio are banks. Bank of Montreal (TSX/NYSE-BMO) has been in the portfolio since April. Today it is trading at $61.78 and yielding 4.5 per cent on its $2.80 dividend.
Toronto-Dominion Bank (TSX/NYSE-TD) came on board in June. It yields 3.3 per cent on the $2.44 dividend and the shares trade at $71.89.
The other two stocks are in the energy business, one a shipper and the other a producer. TransCanada Corporation (TSX/NYSE-TRP) has been in this portfolio for over three years. It trades today at $36.62 and is yielding 4.3 per cent on its dividend of $1.60.
The producer, Canadian Oil Sands Trust (TSX-COS.UN; OTC-COSWF) has been in the portfolio for two years. Its units trade at $28.98 and the yield is 6.9 per cent on the $2.00 distribution.
An impressive growth record
Johnson & Johnson (NYSE-JNJ) probably has at least one product in almost every household in North America and many more around the globe as well.
Nonetheless, it has had a few problems of late. Several of its children’s medicines had to be recalled because of manufacturing flaws. This was embarrassing, says Ms. Turanova, “but it isn’t likely to significantly affect the company’s bottom line or ability to pay the dividend.”
J&J has three divisions — pharmaceutical, medical devices and diagnostics and consumer — and its growth record is impressive.
76 consecutive years of sales increases, 25 consecutive years of adjusted earnings increases and 47 consecutive years of dividend increases. With enormous amounts of free cash flow, future dividend increases seem to be a cinch.
While Johnson & Johnson should rebound quickly from the product recall, it may have a larger hurdle to jump with the expiry of some of its patents. But it also has nine new blockbuster drugs on the way.
The company is the undisputed industry leader, adds the author. And while it won’t grow as fast as smaller rivals, history tells us nobody grows more steadily than J&J. It trades at $57.63 (about ten dollars off its 52-week high) and yields 3.7 per cent on the $2.16 dividend.
The world’s biggest
In Switzerland we find the world’s biggest pharmaceutical company, Novartis (NYSE-NVS). It has four divisions — pharmaceuticals, vaccines and diagnostics, Sandoz (its line of generic drugs) and consumer health.
Last year’s revenues topped the previous year’s by 7 per cent while earnings per share and net income were up 8 per cent. This led to a 5 per cent raise in the dividend. Since Novartis introduced a dividend in 1996, it has increased it every year.
This company is also immune to the unhealthy euro, since Switzerland still has the Swiss franc. Plus two-thirds of its revenues come from emerging markets, so Europe’s problems are not necessarily shared by Novartis.
Some of its patents are expiring, but it has a powerful pipeline of new drugs coming behind them. Meanwhile, it trades at a discount to the industry average, at $49.21, and yields 3.9 per cent on the $1.95 dividend.
A rare paragon
The advisory has just added Abbott Laboratories (NYSE-ABT) to the Income Portfolio. It is “another health care leader whose shares sell for less than they once did,” says Ms. Turanova.
Abbott’s products cover the life span from infancy to old age, from nutritional offerings to lab diagnostics to medical devices to drugs.
The company is able to go head to head with giant rivals and still keep up its “industry-beating growth,” says the writer.
A few years ago, it spun off its hospital products division and targeted several pharmaceutical acquisitions. In medical devices, its strong product line has made notable inroads. For instance, it has topped Johnson & Johnson in the critical area of drug-eluting stents (that is, drug-coated stents introduced into the artery) and become number one in that area.
All of this generates lots of operating cash flow, a good deal of which is returned to shareholders. The dividend has been raised for 38 consecutive years. The dividend has grown at the rate of 9 per cent over the past decade and 10 per cent this year.
“In sum,” concludes Ms. Turanova, “Abbott Labs is that rare paragon that can pay shareholders without sacrificing growth.”
It trades at $48.93 and yields 3.6 per cent on the $1.76 dividend.
You may or may not wish to take U.S. health care stocks as directed by this advisory. But all the stocks featured above have also been chosen for income — and a regular dose of dividends never hurt anybody.
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