As dividend growth investors, we seek, to the best of our ability, long term sustainable growth in sectors and industries that we perceive to have strong tailwinds for the foreseeable future. One such sector that’s often touted as being extremely resilient with a lot of room for future growth is the health sector. We’ve all heard about our aging population and the need for health care facilities and the REITs that offer such physical real estate for this field along with exciting biotech companies that promise a lot of future growth and dividend growth coupled with extreme volatility and the big pharmaceutical companies providing cutting edge drugs to enhance and elongate our lives. But what about the less exciting, yet just as important medical devices sector? These are the companies that do not make the exciting headlines yet have and continue to provide very reliable, sustainable and predictable dividend distributions for multiple decades.
The medical devices industry is massive and sees $370 billion in sales globally each year. It is this industry that develops and distributes the less exciting medical devices that are used globally each day. Devices such as syringes, scalpels, catheters and implantable pacemakers to name a few. One might think of this sub-sector of the health industry as similar to a consumer staple business. No cutting edge new drugs or genetic breakthroughs here, just good old fashioned “medical hardware” that makes taking care of the sick a little easier. Of course, with this stability and reliability comes less volatility in general. With that being said I’d like to take an overview of some of the larger players in this space.
First up, is Stryker Corporation (SYK). Based in Kalamazoo, Michigan, SYK develops implants for use in hip and knee joint replacements as well as various types of surgical and emergency medical equipment. Currently yielding a relatively low 1.56% with an equally low payout ratio of just 27.0%, SYK has plenty of room to continue paying and raising its dividend based on current cash flow. SYK has been paying dividends for well over two decades and has been raising it’s dividend at an impressive rate the last five years with an annualized dividend growth rate of 17.57% during that time. With a current PE of 25.8, SYK is trading below its five year average PE of 29.4. Of course, a four star rating from Morningstar doesn’t hurt either.
Next is a long time holding from my own portfolio, Becton, Dickinson and Company (BDX). Founded in 1897 and based in Franklin Lakes, NJ, BDX develops various types of needles, syringes, and intravenous catheters as well as IV systems and pen syringes for diabetes patients among many other items. With a current yield of 1.82% and a low payout ratio of 31.4%, BDX sports a low but very safe yield. Of course, BDX is one of those rare companies that have the distinction of raising its dividends every year for over four decades. That, alone is a clear statement about BDX’s commitment to its dividend distribution policy and the resilience of operating within this sector. The ten year annualized dividend growth rate for BDX is an impressive 12.54%. From a simple PE perspective, BDX is trading at a relatively high multiple of 44.4 when its five year average PE sits at just 20.3. Forward PE looks more enticing at just 16.0. BDX is another four star rating stock from Morningstar.
Another long time holding of mine in this sector is CR Bard Inc. (BCR). Operating for well over 100 years BCR develops various stents, balloons, meshes, surgical sealants, irrigation, wound drainage and other related products for the medical field. Currently yielding just 0.51%, I know this stock will not capture the attention of many of the dividend income investors who are searching for better current yield. Nevertheless, BCR, while offering a low current yield has a ridiculously low payout ratio of just 9.6% based on current cash flow which makes this small yield very, very safe with room for growth. Speaking of growth, BCR has been raising its dividend for over four decades with a ten year annualized dividend growth rate of 6.29%. Very conservative numbers to say the least from a dividend distribution perspective but just goes to show how management likes to deal with its dividend policy. Of course, long term BCR has appreciated quite a bit from a capital appreciation standpoint. With a current PE of 73.7, BCR does not look cheap by any standard at current levels.
Of course, the following name needs no introduction as it is already a staple in almost every long term dividend growth portfolio, Johnson & Johnson (JNJ). Among various consumer and pharmaceutical businesses JNJ is involved in, it also is in the medical devices space and is the world’s largest medical devices business, with $28.5 billion in total sales for 2013. With a current yield of 2.88% and a moderate payout ratio of 46.2%, JNJ, like all the names mentioned above offers a sustainable yield. Paying increasing dividends for over five decades puts JNJ in an elite category of dividend payers and it has grown it’s distribution at a 8.75% clip annualized over the last ten years. Not too bad from a well established company that has been in existence for well over 100 years. With a current PE of 19.0, JNJ is about in line with its five year average PE. Forward PE looks more enticing at 15.0.
Finally, no overview of the medical devices sector would be complete without the mention of Medtronic plc (MDT). Makers of various surgical instruments including sutures, mesh implants, heart valves as well as needles, syringes among many other medical products. Currently yielding 2.02% with a moderately low payout ratio of 34.7% based on current cash flow, MDT like every other name mentioned offers a sustainable dividend with room for future growth. Having raised its dividend for multiple decades MDT also sports an impressive ten year annualized dividend growth rate of 11.43%. From a valuation perspective MDT looks to be quite expensive with a PE of 39.4, well above its five year average PE of 18.0.
While most stocks presented in this overview appear to be expensive when looking at a simple PE metric, one thing that can be gleaned from the number above is the sustainable and growing distributions they each offer. Being a long term dividend growth investor, finding a sustainable yield is my primary concern.
What do you think about investing in the medical devices sector? Are any of the names mentioned above in your portfolio? With all the talk about how the health sector will grow in all respects in the coming decades with an increasing elderly population it may make sense to get a piece of this growing space. Please let me know below.
Disclosure: Long BDX, BCR, JNJ
Image courtesy of: Sira Anamwong at FreeDigitalPhotos.net
24 thoughts on “Medical Devices Make For A Healthy Portfolio”
Thanks, Keith. Weirdly, I am looking at exactly this sector at the moment. Could not agree more with you. It is an attractive long-term pick despite what sometimes looks like unattractively high valuations and low yields. That is why I wrote about the sector more generally as a preamble to an analysis series on the sector on Seeking Alpha (see http://bit.ly/1TTnoMe for more).
I’d also not miss out Smith & Nephew. Although a UK-based business it is listed on the NYSE (SNN) and is a nice addition to that list. It may serve as the first instalment of my Medtech series when it finally gets going! We will see. JNJ is a great play because, of course, its conglomerate nature across pharma, consumer and medtech is very attractive. I’d love to load up a little more on my little position in the company when I get time!
Some great picks out there! Thanks again for the interesting post.
There’s little doubt that this sector has a nice long term tailwind behind it considering the demographics it is currently serving and will serve in the future. Thank you for bringing SNN to my attention. I have to admit it’s a new name for me to consider in this space. Being a long term dividend growth investor it’s sometimes hard buying into low yielding stocks when the aim is to build a decent passive income stream. Names like BCR come to mind and though it has performed quite nicely in my portfolio, from a dividend perspective it is minuscule. Thank you for stopping by and sharing your thoughts.
Love just about every aspect of the health care sector for the long term. I own all that you mentioned except BCR and SYK but hope to get SYK added to my portfolio in the future. Wonderful sector with great demographic tailwinds and some hefty dividend growth streaks.
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Well said. I liken the medical devices sector as the consumer staple of health. Nothing too exciting about a “staple” company. Just great products that are required in any medical setting and for the most part disposable which means a need for a continuous supply ensuring good business. It’s amazing how many great sub-sectors within health can make great long term investment picks. As always, I appreciate your comment.
I am a big fan of the sector in general, though I am only long JNJ. The field and in equipment available has improved so much in the last few decades. Of those you mention SYK, BDX, and MDT interest me the most for adding a new position.
Thanks for the article!
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I think most long term investors favor the health sector for the foreseeable future. Being long only JNJ is not necessarily a bad thing. JNJ is as diverse as they come in the health sector with pharmaceutical, consumer and medical device plays. Of course, adding a little diversity within the space doesn’t hurt either especially when sticking with some of the historical dividend stalwarts. I like BDX a lot too long term and wouldn’t mind adding that name to baby DivHut’s portfolio as well. Thank you for sharing your thoughts.
I don’t currently hold any medical device manufacturers in my portfolio but JNJ has been on my watch list for sometime. They have been around for so long and they have a household name that would take a semi truck running through their portfolio to knock out. You can bet that if they drop much lower with the P/E ratio and therefore price, i’ll be locking in a position with them while it’s hot and ready.
Dividend Monster recently posted…Aim for a Catalyst Stock
JNJ is one of those ‘must have’ stocks for any long term dividend growth portfolio. It was interesting to learn that JNJ is the largest medical device company out there based on sales. Looks like you get everything with that stock. A pharmaceutical play, a consumer play and a medical devices play. It seems that anything health related is a great sector to be involved in long term. Thank you for stopping by and commenting.
Great list of companies there. I only own JNJ out of this group but would like to own a couple more in due time. Every time I read something on the Stryker Corp I think of the bad guy in X-Men who created Wolverine…haha. I believe a lot of hips and knees will be replaced over the next 10 years.
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With our population gradually becoming more elderly a lot of hips and knees will definitely need to be replaced along with heart valves, catheters and more. The medical devices industry is a very resilient sector and can weather downturns in the market relatively well as demand for their products are not cyclical as with many industrial names. As always, I appreciate your comment.
I need some SYK and BDX, they just always seem to be overvalued! I’ve got JNJ but the track records with regards to the other stocks makes me want to buy those! I need more medical devices!
Thanks for putting these on my radar
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Sometimes high quality names always seem a bit pricey. It may be the cost of buying into a long time dividend payer and raiser. We see high valuations for many consumer staples too. You know the saying, you get what you pay for and some of these medical device plays might be worth that extra value in terms of higher share price. Thank you for stopping by and commenting.
Really great post. I hope to be able to pick up something from this industry soon enough – i definitely need to diversify into this area a little bit and away from finances/real estate more than i am today. JNJ is first on the list, and my hope is that they drop low enough for a buy soon enough. Anything close to 100$ would be fine by me, even if under 100$ would be positively delicious.
Thanks for the article! Looking forward to more!
If you are looking for a relatively stable industry, the medical devices may offer the same “sleep well at night” feeling as many of the consumer staples. Keep watching your favorite names in the space and I’m sure a buying opportunity will pop up. It seems that whenever JNJ drops below $100 it garners a lot more attention from our blogging community. Thank you for commenting.
A really good article, I like health as a sector more than most others. JNJ is right up there for being a great DG but also the sector it’s in (and being diverse). The others..I like the sound of but I’m also wary of how if a competitor released something substantially superior / better value then their own product. I’d add some JNJ to my portfolio if I was considering the above 🙂
I appreciate the kind words about the post. Regarding the names mentioned, you do make a valid point in that JNJ is the most diverse name of the bunch. However, each of the other companies, though without a strong consumer play, offer many different types of products in their respective pipelines. In other words, they are not overly reliant on just a handful of products rather a wide array. As always, I appreciate your comment.
Awesome article, as always. I recently bought some JNJ stocks and am excited about what it’ll do in the long run. I’ll definitely be checking out the other stocks you mentioned here; now that the baby boomer generation is retiring and heading towards senior-hood, it’s hard to imagine how this sector will do nothing but grow. The low yields are a shame, but invest now and watch them grow right?
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The health sector will more than likely remain robust for the foreseeable future. Of course, along the way there will be the inevitable ups and downs but as long as the dividend remains safe and continues to grow I’ll be a happy camper. Though the names mentioned do not sport eye popping current yields they do offer very attractive dividend growth rates based on past performance. Remember, being a long term dividend growth investor allows for you to create a very high yield on cost over time. Thank you for stopping by and commenting.
It seems like a good list of stocks, but low yields and high PE ratios make these not very appealing to many investors. I only own JNJ, and with a correction I would consider MDT. Thanks for the info and good luck.
EL @ Moneywatch101 recently posted…Why I’m not Buying Sneakers In 2016
Though these stocks might not sport the most attractive current yields, they do offer very attractive long term dividend growth rates and all sport safe payouts. After all, what good is a high yield if it gets frozen or cut down the road. Overall, this is a very solid sector to invest for the long term. Glad you enjoyed this piece. Thank you for commenting.
Thanks for sharing interesting post for your readers. Medical devices are essential at this moment especially for seniors who live alone. These devices can make seniors independent in many ways.
I don’t know much about this field though. But, I take keen interest in all these stuff.
Medical device companies have a strong tailwind as our population gets older. Many of these companies could be great long term dividend paying investments. I appreciate your comment.
Great list. I used to work by stryker corporation there facility is huge.
Thanks for sharing that insight. SYK is a well known dividend holding for many in the DGI space.