The healthcare sector has been one of the best sectors for dividend hunters — most of the companies operating in the sector generate massive cash flow and payout a large chunk in dividends. Despite tight regulations and hefty investment in new technologies, these companies have been able to generate impressive growth figures.
Emerging market growth
The business model for GlaxoSmithKline plc (ADR) (NYSE:GSK) focuses on growth, risk management, and improved financials. The company has three broad segments: Pharmaceuticals, Vaccines, and Consumer Healthcare — these segments are interlinked, resulting in cost synergies. The Pharmaceutical segment is the biggest contributor to total revenue, followed by consumer healthcare and vaccines.
At the moment, the main growth regions are emerging markets. All the big players are turning their focus towards capturing these high-growth markets. The company has already expanded its efforts in these markets and sales from these areas reached 26% of total global sales during 2012. Furthermore, the company has managed to introduce 23 patent-protected medicines in the U.S.A. and Europe over the last five years.
Consistent dividend payments have been one of the most important characteristics of GlaxoSmithKline plc (ADR) (NYSE:GSK). At the moment, the company pays an annual dividend of $2.20, yielding over 4.20%. A look at the trend in dividend payments indicates that the company has been consistently increasing dividends over the last five years. In addition, cash flows have been solid and growing sales from emerging markets will allow the company to maintain its current dividends.
Pursuing aggressive growth
As I mentioned above, the emerging markets are the most attractive at the moment. AstraZeneca plc (ADR) (NYSE:AZN) has the strong presence in emerging markets, especially in China and India. The company has around 5-7 projects in the phase III stage, which will be completed by 2014. AstraZeneca plc (ADR) (NYSE:AZN) has also acquired Pearl Therapeutics, which should further strengthen its product portfolio.
The company is following an aggressive growth strategy and it is one of the suitors for Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX). Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) is valued at around $9.5 billion, and the company is one of the most important players in the $61 billion global cancer medicines market. If the company acquires Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX), its product portfolio will expand significantly, which will ensure future growth.
The company pays dividends twice a year and the current annual divided stands at $3.80 per share, yielding over 7.50%. The stock is one of the highest yielding stocks in the market. Furthermore, future growth opportunities make it an attractive dividend and growth stock.
Following different strategies
Pfizer Inc. (NYSE:PFE) operates in five segments: Primary Care, Specialty Care and Oncology, Established Products and Emerging Markets, Animal Health and Consumer Healthcare, and Nutrition. Pfizer Inc. (NYSE:PFE) is also focusing on emerging markets and sales from emerging markets increased 6% during the previous quarter.
In the face of increased competition, Pfizer Inc. (NYSE:PFE) has planned to increase its product portfolio. Current pipeline projects include Eliquis, Xeljanz, and various oncology products. Pfizer Inc. (NYSE:PFE) is also focusing on growth through acquisitions, and it was also rumored to be preparing a bid for Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX). However, there are reports that the company may not go ahead with its plans to buy Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX).
Moving onto the dividend — the company pays an annual dividend of $0.96 per share, yielding 3.25%. The company has been consistently increasing its dividends over the last three years. Pfizer Inc. (NYSE:PFE) has one of the best free cash flow figures in the industry. The company has generated over $15 billion in free cash flow over the past twelve months and paid $6.6 billion in dividends, which puts the payout ratio at around 43%.
Furthermore, the company also supplements dividend payments with stock repurchases — Pfizer repurchased shares worth $11 billion over the past twelve months. It is one of the best dividend picks in the sector, in my opinion.
Conclusion
All of the above mentioned companies have impressive dividend yields and attractive growth opportunities. Pfizer and GlaxoSmithKline plc (ADR) (NYSE:GSK) offer lower dividend yields compared to AstraZeneca plc (ADR) (NYSE:AZN), but these two giants have stronger free cash flows. Healthcare stocks are an attractive investment opportunity at the moment due to increased focus on emerging markets. These markets have the ability to substantially increase the revenue of these giants.
Ishtiaq Ahmed has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Ishtiaq is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 3 Healthcare Stocks for Growth and Dividends originally appeared on Fool.com is written by Ishtiaq Ahmed.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
