The big pharm companies are an interesting long term consideration because every year the Baby Boom generation ages and the reality is as people age more things begin to not be perfect with their health. People tend to want relatively quick fixes and will turn to a pill or a drug to achieve it, if you have a healthy balanced lifestyle that may be the better answer, but for many it is too late to change. Since baby boomers are retiring, the long term growth of the health sector is going to be assured for at least the next 40 years. On the stock market the sector has declined in price, what are the good companies? Scott Barlow in a column A prescription for stable growth examined the sector:

1. He ranked all companies in the S&P 500 health care index by 10 year volatility of cash flow. The reason was to identify the most consistent money making companies. This narrowed his search to 12 companies.
2. Next he checked for valuation levels by comparing the current price to cash flow ratio with the 5 year average. The good news all 12 are trading above their historical averages or no bad choices.
3. He examined the 5 year average annual earnings a share increases
4. He looked at average analyst estimate looking at the long term profit
5. the dividend yield is included.

 

Company                 P/CF         5 yr       5 Yr Avg EPS      Est LT EPS     3 Yr         Dividend

P/CF         Growth %          Growth %     Ann Tr       Yield %

J & J                           17.81         14.13          9.59                    6.55              10.35             2.77

Medtronic              19.23          13.79       -0.79                   7.76              14.38             2.11

Quest Diagnos     11.14            10.71        43.24                   7.28             12.10              1.95

Eli Lily                    21.95          15.11            0.19                   11.45             16.51             2.78

Pfizer                      12.65           11.35          -13.17                  5.53               3.38             3.91

Lab Corp                11.56           10.96             5.72                11.17               6.97             n/a

Becton Dickinson 14.10        11.94            87.13                 11.28             18.56            1.57

Dentsply Sirona     21.23        14.98             1.85                    9.76             7.96            0.51

Patterson Cos          53.88        18.14            3.19                    7.69              2.93            2.12

Agilent Tech             17.95       17.39           -15.35               10.43              7.04              1.06

Stryker                       23.69        20.01             63.29              9.21               17.43            1.31

Baxter Internatl      19.94          11.72           n/a                   12.36              11.91            1.10

Source: Bloomberg

Linking to dividend paying stocks, in the column Mr. Barlow did not come up with a clear winner as all the companies have good things about them and few relative concerns. For example J&J long term EPS growth is the lowest, but its ability to generate cash flow is the best. If you start with the best companies, there is often no bad choice – as you look through the annual reports you can see whether the company fits your values or not. The companies are in the broad sector of health care but all do something different. If you want to double and triple your stock price, maybe look elsewhere, but if you want to participate in the health care sector with low risk and high returns – these are good stocks to own.

There are more questions than answers, till the next time – to raising questions.