BY GORDON PAPE, Special to the Star
Fri., June 22, 2018
Everybody’s attention is focused on the rapidly escalating global trade wars, and with good reason. Canada is highly vulnerable in any prolonged trade battle, and we have little leverage to mitigate the impact.
U.S. President Donald Trump appears determined to punish us for Prime Minister Justin Trudeau’s comments after the G7 summit, and if we know anything about the U.S. leader, it’s that he usually follows through on his threats.
Western countries are going to need a lot more health practitioners, hospitals and long-term care facilities. (DREAMSTIME / DREAMSTIME)
But the trade wars will eventually end, probably on Mr. Trump’s terms. The more fundamental demographic shifts we are seeing in our society won’t go away. Western countries are aging at an accelerating rate. A few years ago, the Canadian Medical Association published a report projecting the percentage of the population over 65 would jump from 14 per cent in 2010 to about 25 per cent in 2036.
The U.S. is faced with a similar problem. A 2016 report published by the Population Reference Bureau estimates the number of Americans in the 65+ category is expected to more than double between now and 2060 to a total of 98 million.
That means we are going to need a lot more health practitioners, hospitals and long-term care facilities. We are going to be spending more money on prescription medications, dental care, eyewear, hearing aids and mobility devices.
In short, it means well-managed companies in the health-care industry are going to do very well in the years ahead, regardless of what happens to the broader economy. Demographic trends are on their side.
Unfortunately, from a stock market perspective, Canada doesn’t have much to offer investors. The S&P/TSX Capped health-care Index only contains eight stocks, three of which are cannabis companies such as Canopy Growth, the largest stock in the index by market cap.
The U.S. is a much more fertile hunting ground if you’re looking to play the long-term trends by adding some health-care stocks to your portfolio. Even after the introduction of Obamacare, the U.S. medical system operates on a free market basis. You can invest in American insurers, hospitals, clinics, prescription drug distributors, pharmaceutical manufacturers and more. National health-care expenditure in the U.S. was over $3.5 trillion in 2017. It is estimated to rise to $5.5 trillion by 2025. A lot of companies are going to get richer in the process. Here are three I like. All are active recommendations of my Internet Wealth Builder newsletter.
UnitedHealth Group (NYSE: UNH): UnitedHealth is one of the leading medical insurance providers in the U.S. through its UnitedHealthcare platform. It provides coverage for individuals, employers and medical practitioners, as well as supplementary Medicare plans.
The company’s other platform, Optum, is in the information and technology business. It provides services to governments and their health-related agencies, helps doctors provides better clinical and business performance through technology and assists employers in managing their insurance programs.
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This is a huge company. Revenue in the first quarter of this year was $55.2 billion, up 13.3 per cent from the same period in 2017. Net earnings were $2.87 per share, up 28.7 per cent. Earlier this month, the company increased its quarterly dividend by 20 per cent, to $0.90 a share.
Stryker Corp. (NYSE: SYK): Stryker is one of the world’s leading medical technology companies, selling its products and services in more than 100 countries. If you’ve ever been in hospital, chances are this company built your bed. It’s a leader in joint replacement technology, endoscopy equipment, wheelchairs, a whole range of surgical equipment and much more.
An inventive Michigan doctor founded the company in 1941 to sell the products he created. The company went public in 1979. It now employs more than 25,000 people and owns 5,200 patents. It is a member of the Fortune 500.
Stryker is not as big as UnitedHealth but it’s still a giant in its field. First-quarter revenue was up 9.7 per cent to $3.2 billion. Adjusted earnings, which exclude the impact of one-time items, were $638 million, up 13.9 per cent. On a per-share basis, that worked out to $1.68 (fully diluted), an improvement of 13.5 per cent from last year.
The share price hit an all-time high on June 7 before retreating to the current level.
McKesson Corp. (NYSE: MCK): This company provides a variety of services to the pharmaceutical industry, a main one being prescription drug distribution. Along with two other companies (Cardinal Health and AmerisourceBergen) it acts as the middleman between drug manufacturers and dispensers (pharmacies, hospitals, doctors, etc.). Those three firms operate as an oligarchy in their segment of the economy, similar to the Big Five banks in the Canadian financial sector.
The company recently reported results for the fourth quarter and the full 2018 fiscal year. Revenues for the fiscal year were $208.4 billion, up five per cent compared to $198.5 billion a year ago.
While revenue was strong, full-year earnings per share from continuing operations were only $0.30, down sharply from fiscal 2017. But management projected a better year in fiscal 2019 with revenue growth in the mid-single digits and adjusted earnings per share between $13 and $13.80. Free cash flow is expected to be in the range of $3 billion.
If you would prefer to invest in an ETF rather than individual stocks, take a look at the Harvest Healthcare Leaders Income ETF (TSX: HHL). It invests in 20 of the largest health-care companies from around the world, including UnitedHealth, Stryker, Johnson & Johnson, Merck, Amgen, and more. The managers write covered call options to generate extra cash, which enables the fund to pay a monthly distribution of $0.0583 per unit.
Performance numbers aren’t great, with an average annual return since inception (December 2014) of 3.41 per cent. But this fund appears to be well-positioned for the current market climate. There’s an unhedged U.S. dollar version that trades under the symbol HHL.U, which is a better choice if you expect the loonie to keep falling.
If you prefer a U.S.-based ETF, there are a number to choose from. One of the best performers this year is the SPDR S&P health-care Equipment ETF (NYSE: XHE), which is up more than 25 per cent so far in 2018 and has averaged almost 22 per cent annually for the past five years.
Health-care is not a top-of-mind investment for many Canadians because of the paucity of choice in our market. But if you want to ride the demographic wave, you should have some of these companies in your portfolio.Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
His website is www.BuildingWealth.ca
Follow Gordon Pape on Twitter at twitter.com/GPUpdates