A couple of days ago I found myself in a pharmacy for the first time in a while. This pharmacy, like every other drugstore, was one of those really bright and sparkling white stores where someone with a big-faced grin showing even whiter teeth sells you all sorts of medication. Nobody really likes going there, yet we’re always eager to get our hands on what they’re selling. That is when it hit me: pharmaceuticals are awesome.
You see, just like basic consumer items, such as food, beverages, and personal care products, we can’t really do without medication. Even though everyone would rather avoid using drugs, we all rely on them at multiple points in our lives to get us through inevitable diseases, illnesses or injuries. I really don’t like taking drugs, but I admit being pretty happy when I left the store with my box of Sinutab.
Upon my arrival home, I was even more pleased to find out that Sinutab is a Johnson and Johnson (NYSE:JNJ) product. How great is it that a small fraction of my purchase, ridiculously small it may be, will flow back to me in the form of future dividends because I’m a shareholder?
I started to think if it was a good idea to increase my exposure to health care companies, even after having bought Novartis (VTX:NOVN) only last month. After all, if there’s one thing I like more than receiving dividends now, it’s the prospect of future stable, sustained, and increasing dividends over time from companies that provide services or products that are absolutely essential to almost anyone.
There are three good arguments I came up with in favour of adding more health care stocks to my portfolio.
1. There’s more of us every day
Even though it might seem like a ridiculous argument, it’s an irrefutable fact that there’s more people wandering the globe every day. For companies providing basic goods and services that simply means more customers.
While a company like BMW (ETR:BMW) could potentially increase its customer base because of population growth, health care companies are sure to count new world citizens among their clientele. After all, these additional people might not be interested in car-ownership, but they’re sure to rely on meds at some point in time. That’s why more people equates to more future earnings.
2. Our population is ageing
Another fact of life is that everyone grows old. Over the past century, however, we’ve seen the average life expectancy go up exponentially. With more people living longer and longer, health care corporations are sure to capitalize on the additional medical attention and care the elderly need. This effect will become even more pronounced in the next couple of decades as the baby boomers – people born in the post-World War II period – are all moving into retirement age.
In Belgium there’s often a lot of controversy about government expenses swinging out of control to properly care for this large demographic as there are fewer and fewer working-age citizens paying taxes to support our social security and health care system. Obviously, what has got political commentators so worried works the other way around for companies providing health care solutions. An older demographic means more sales and thus added profits.
3. The middle class in the emerging markets is growing
While almost everyone in the West has access to affordable health care, especially now that more and more countries are implementing Obamacare-like policies, proper medical treatment often is not available to those in emerging economies. However, with emerging markets growing over time and catching up with us, drugs and pharmaceuticals slowly become more accessible to larger parts of their population.
Traditionally the middle class of a country grows when that country’s economy develops over time, with an increasing number of households being able to provide for more than just the basics like food and shelter. When middle class families have more household income available to them, they’ll typically first direct this newfound wealth towards personal and health care. Again, more households buying health care products means more earnings for the providing companies.
Sometimes it’s better to look at the bigger picture than at the nitty-gritty of a corporation’s fundamentals or a bunch of technical stock analyses. By understanding general trends and by applying common sense we can often make an educated guess about which companies are set to perform well in the future and which could face major challenges.
When considering the three arguments mentioned above, that is why I believe that health care companies and pharmaceuticals might be headed towards a bright future – a future in which an increasing number of people will come to rely on their products, both in the developed world as well as in emerging markets. As such, dividend growth investors would do themselves justice to consider health care as a major corner stone of their portfolio.
Taking a piece of my own advice, I’m currently keeping an eye on another Swiss pharma company, Roche Holding (VTX:ROG). With an impressive 29 years of dividend growth under its belt, Roche is a prime example of what makes the health care sector so great: stable and sustained increases in both earnings and returns to shareholders.
Do you agree with my point of view? And if so, which health care companies do you own or would you like to own?