The U.S. government has been consistently cutting rates for the last few years. The aim of this exercise is to jump start the sluggish U.S. economy. While rate cuts contribute towards economic growth, they make life difficult for fixed income investors. A lot of these investors have started investing in dividend stocks. This is the very reason that demand for high dividend stocks has greatly increased.
The healthcare industry has one of the highest dividend yield in the entire market. The high earning’s visibility, due to patent protection, makes these dividends stable and safe. The following three companies have some of the best dividend yields in the entire healthcare sector.
Big-Pharma
AstraZeneca plc (ADR) (NYSE:AZN) is one of the largest healthcare companies in world. It is involved in the discovery, development, and commercialization of pharmaceutical products.
The company is currently undergoing a patent crisis. Some of its major patents have expired or are on their way out. The blockbuster drug, Seroquel IR, is facing generic threat. Moreover, there are no high caliber candidates in the pipeline which can fill this void. AstraZeneca plc (ADR) (NYSE:AZN)’s new CEO, Pascal Soriot, has recently engaged in an overhaul of the entire company and has restructured the company to focus on specific areas of research.
Despite the issues mentioned above, AstraZeneca plc (ADR) (NYSE:AZN) has the best dividend yields in the entire healthcare sector. The company has a dividend yield of 7.8% and is currently trading at its mean sell side target price. An OCF yield of 10.6% shows that the dividends of AstraZeneca plc (ADR) (NYSE:AZN) are safe.
While the pipeline is pretty weak, the company does have enough patent protection to sustain the current dividend yield. The street expects AstraZeneca plc (ADR) (NYSE:AZN) to post revenues of around $25 billion in 2014 and 2015, while this points out to little growth, it does ensure that it will keep posting annual cash flows in the $6 billion to $7 billion rage.
Hospital Industry
Select Medical Holdings Corporation (NYSE:SEM) operates outpatient rehabilitation clinics and specialty hospitals in the U.S. The Specialty Hospital segment gives acute care for medical conditions such as neuromuscular disorders, traumatic brain, respiratory, spinal cord injuries, cancer, renal diseases etc.
The company offers a stellar dividend yield of 4.9% and is trading at a 15% discount to mean sell side target price. Select Medical Holdings Corporation (NYSE:SEM) generates operating cash flows of approximately $300 million which gives us an OCF yield of around 30%. This shows that the company’s dividends are sustainable and there is possibility of dividend growth.
As the chart below shows that over the last 5 years, the company has managed stable growth of cash flows and revenues. This is the key hallmark of a stable dividend investment.
SEM Revenue Quarterly data by YCharts
Diagnostic Substances Industry
Meridian Bioscience, Inc. (NASDAQ:VIVO) is a life sciences company which is involved in the development and commercialization of clinical diagnostic tests kits for respiratory, parasitic and gastrointestinal diseases. Its major products include, C. difficile, Rotavirus, Adenovirus, H. pylori, Campy etc.
Meridian Bioscience, Inc. (NASDAQ:VIVO) offers a dividend yield of 3.5% which is more than 3 times the industry average. The forward P/E of 22x is also below industry average P/E of 30x. The company generates approximately 43 million from cash flows which gives us an approximate OCF yield of 4% i.e. 0.5% above the dividend yield.
The street expects Meridian Bioscience, Inc. (NASDAQ:VIVO) to show 5- year average earnings growth of 13.3% which is 25% above the market average. If we use the mean EPS estimate and industry average p/e multiple, we can calculate a 2014 target price of $27 i.e. 25% upside on current price levels. These cheap valuations and high dividend yield makes Meridian Bioscience, Inc. (NASDAQ:VIVO) an attractive investment for dividends and capital appreciation.
Bottom-line
These three companies have a stellar dividend yields and protection of an even higher OCF yield. The healthcare industry usually has a high earnings visibility because drugs/treatments are protect by patents. These are excellent dividend investments for investor looking for a stable stream of income.
The article 3 High Dividend Healthcare Stocks originally appeared on Fool.com and is written by Mohsin Saeed.
Mohsin Saeed has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mohsin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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