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
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