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Billionaires Jamie Dimon and Elon Musk have both recently voiced concerns that a recession could be on the way. That makes now as good a time as any for investors to brace themselves by recession-proofing their portfolios.
The healthcare sector tends to hold up better than the broader economy in a recession. This is because of the essential nature of the services provided by the sector. Here are two prominent healthcare stocks that look like solid buys at this time.
Image source: Getty Images.
1. CVS Health
CVS Health (CVS 0.46%) is a leading pharmacy chain and health insurer. The company’s Aetna health insurance subsidiary had a medical membership of 24.5 million in the first quarter of 2022– up 3.8% over the year-ago period. And the pharmacy segment filled the equivalent of 567 million monthly prescriptions in the first quarter, which equates to a 5.8% year-over-year growth rate.
CVS Health has tailwinds going for it that should continue to push medical membership and prescriptions filled higher in the years ahead. As the cost of healthcare rises, more individuals will turn to health insurers to assume risks on their behalf. This will result in growth in the amount of health insurance premiums collected each year by CVS Health.
A key metric for health insurers is the medical benefit ratio, which divides a company’s medical claims costs into its premiums. And a ratio below 100% indicates profitability. The company’s medical benefit ratio of 83.5% in the first quarter suggests that the increased demand for health insurance will be profitable and lead to earnings growth. The increasing prevalence of chronic medical conditions should also push the company’s filled prescription volumes and revenue upward over time.
These factors are why analysts expect that CVS Health will generate 5.7% annual earnings growth over the next five years. And the stock offers investors a 2.3% dividend yield that looks to be safe, which is much higher than the S&P 500 index’s 1.5% yield. With the dividend payout ratio projected to be 26.5% in 2022, CVS Health should hand out high-single-digit annual dividend increases in the years ahead.
CVS Health’s solid fundamentals appear to be going unrecognized by the market as well. This is supported by the fact that the stock’s forward price-to-earnings (P/E) ratio of 11.2 is much lower than the healthcare sector average of 16. That’s why I believe CVS Health could fit in a dividend growth stock portfolio.
2. Medtronic
Few companies are having as positive of an impact on global health as the pure-play medical devices maker Medtronic (MDT -0.49%). This is because the company’s countless medical devices improved the lives of 75 million patients around the world last year.
Given the growing and aging global population, it’s a near certainty that Medtronic will have a positive influence on the health of more patients with each passing year. This is especially true considering that the company conducted over 300 clinical trials and received over 200 regulatory approvals in its previous fiscal year for its medical devices, according to chief executive officer Geoff Martha.
Due to favorable demographics and Medtronic’s exceptional product pipeline, analysts are forecasting 12.7% annual earnings growth through the next five years. The stock’s market-beating 2.8% dividend yield also appears to be sustainable. This is because Medtronic’s dividend payout ratio will be around 49% for the current fiscal year, which should allow for generous dividend growth going forward.
The stock seems to be fairly valued at the current $96 share price. Medtronic’s forward P/E ratio of 17.3 is only a bit higher than the healthcare sector average of 16. If any stock is worthy of a premium over its peers, it would be this Dividend Aristocrat. Simply put, Medtronic is a safe stock to buy in a bear market or recession.
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