The healthcare sector is often one of the most recession-resistant areas of the market given that its products and services remain in demand even as the economy enters a downturn. People value their health as this impacts their quality of life, allowing companies in the healthcare sector to see rather consistent results throughout the economic cycle.
This in turn often allows for healthcare companies to raise dividends at a high rate. In this article, we will examine two names in the healthcare sector that recently handed out 10% dividend increases.
CVS Health Corp
CVS Health Corp (CVS, Financial) is a leading integrated healthcare retailer and service provider. The company controls more than a quarter of the retail pharmacy market and added insurer Aetna in late 2018 in an effort to diversify its business. The $128 billion company has annual revenues of $285 billion.
On Dec. 9, CVS Health Corp announced that it was raising its dividend by 10% for the payment date scheduled for Feb. 1, 2022. This marks the company’s first dividend increase since 2017 as CVS Health Corp had previously prioritized paying down debt associated with the Aetna acquisition.
Management hadn’t given any inclination that it was preparing to raise its dividend, so the announcement was a welcome surprise to shareholders. The company also announced a $10 billion buyback authorization. The dividend still has a compound annual growth rate of nearly 17% over the last decade, showing how robust dividend growth had been prior to it being paused for several years.
The new annualized dividend is $2.20, resulting in a forward yield of 2.1%. This is lower than the recent yield, but matches the average yield since 2011.
Shareholders of CVS Health Corp received $2.00 of dividends per share in 2021. According to Wall Street analysts, the company is expected to earn $7.98 per share this year, leading to a projected payout ratio of just 25%. Estimates for next year’s earnings per share are $8.24, giving an expected payout ratio of 27% for 2022. Both figures are very much in-line with the 10-year average payout ratio of 26%.
With the stock closing Thursday's trading session at $97, CVS Health Corp trades with a forward price-earnings ratio of 12.2. According to Value Line, the stock has an average price-earnings ratio of 13.4 over the last decade, suggesting that the stock is still undervalued.
Stryker
Stryker is a worldwide leader in the medical device industry. The company’s products include hip, knee and spinal implants as well as operating room devices, specialty stretchers and maternity beds. Stryker is valued at $98 billion and has annual revenues in excess of $14 billion.
Also on Dec. 9, Stryker announced that it was increasing its dividend by 10.3% for the Jan. 31, 2022 payment date. As a result, the company’s dividend growth streak was extended to 28 consecutive years, allowing Stryker to retain its Dividend Aristocrat status. Dividend growth has long been strong for the company as it has a compound annual growth rate of nearly 14% since 2011.
The new annualized dividend totals $2.78, giving the stock a forward yield of 1.1%. Stryker has rarely been a high yield stock, though the new yield is below the 10-year average yield of 1.4%.
What Stryker lacks in yield it makes up for in dividend safety. The company distributed $2.52 of dividends per share this year. With analysts calling for $9.12 of earnings per share for the year, the implied the payout ratio will be 28%. Using next year’s estimate for earnings per share of $10.18, the forward payout ratio based of the new dividend is even lower at 27%. Both projected payout ratios are lower than the 10-year average payout ratio of 34%.
Shares closed the recent trading session at $261, resulting in a forward price-earnings ratio of 28.6. The stock has often traded with a premium multiple, reflecting its leading position in its industry. That said, the forward multiple using this year’s earnings estimates is elevated against the price-earnings ratio of 24.5 that Stryker has averaged since 2011.
Final thoughts
The healthcare sector remains a favorite amongst the dividend growth investing crowd and for good reason. Companies in this sector typically have consistent revenue and earnings figures even during a recession as demand for products and services remains high.
CVS Health Corp and Stryker are members of the same sector, but have different dividend growth histories. CVS Health Corp paused its dividend for four years as it reduced its debt obligations, while Stryker has nearly three decades of dividend growth.
The two companies may have taken different approaches to their dividends, but both delivered 10% increases to shareholders recently, and dividend increases seem likely to occur for years to come based on very reasonable payout ratios. Thus, I think CVS Health Corp and Stryker are two names investors looking for high dividend growth should keep on their watchlist.
