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?
Your thinking is spot on, NMW. Healthcare and drugs are something that is absolutely necessary. And its something that ppl dont/cant/wont skimp on. No one wants to be sick. No one wants to die. Its one of the most basic human/animal traits. The global demographic itself will take us into the next level of healthcare business performance. I am a huge fan of the healthcare sector and some of my best investments in the past have been in the healthcare.
Proof is our house 🙂 Back in day – about 4-5 years ago, i realized how lucrative the healthcare sector was – similar to your evaluation here and started investing heavily in it. Back then, I didnt invest directly in stocks but was using mutual funds. Even with the 2%+ MERs, I was able to more than double my money in a few years. I finally liquidated that early in 2014 which paid for nearly half of our home’s downpayment 🙂 I dont think Ive shared this on my blog before…maybe i’ll write a detailed post.
Wow, that’s a significant return in only five years’ time! You could say the healthcare sector payed for your downpayment then. 😀 You should definitely write a post on your experience some time soon. I’m a big fan of these kind of success stories.
It seems we both agree on the huge potential of the healthcare sector because of simple demographic mechanics. When an investment has just one driving force behind it that almost anyone can comprehend, you can count me in!
thank you for the article on this issue, it proved me right that healthcare companies are conservative long-term holdings. I own shares of Johnson&Johnson, Eli Lilly and GlaxoSmithKline and they have been great investments so far. I also would like to add Novartis or Roche Holding to my portfolio but Swiss companies all have gotten a little pricey in the last weeks for Euro investors. Currently I am watching the Australian company Sonic Healthcare. They operate a laboratory in Belgium too, by the way.
I really appreciate your work, so please keep going on! Best wishes for your journey to financial independence!
Poor Charlie from Germany
Thank you for your kind words, they mean a lot to me! I quickly visited your blog too and now I wish my German was better. I understood a thing or two here an there, but not enough to properly follow your entire posts. Glad to see financial independence picking up in Europe!
JNJ and GSK are both stellar companies, which is why I’ve added them to my portfolio too. I still have to taak a look at Eli Lilly, but I’ve heard lots of good about it too.
Novartis and Roche have gotten a little bit more expensive the past few months with the Swiss Frank now being free-floating again. For me though this is one of the best times to invest in Swiss companies since I prefer the free-float over a fixed peg to the Euro. On top of that, even though the stocks may be a bit more pricey for Euro investors, the same effect makes the dividen income go up to. As such, it’s a zero-sum game in the long-run. I hope you find a good moment to pull the trigger!
Best of luck over there,
GSK is currently my only position in the healthcare market, I may add to this in the future with JNJ and others but GSK’s yield was hard to pass over. GSK feels somewhat less qualitative and has to pass some hurdles to ensure it can maintain and preferable grow its dividend but its current yield is still very attractive.
GSK has incredible yield, but a frighteningly high payout ratio too. I’m glad to make that trade-off though since I believe GSK will pull ahead over the next couple of months. They have a couple of great products in their development pipeline.
JNJ should be a core position in everyone’s dividend portfolio, so I’m sure you’ll pick it up at some point in time. At the moment I feel the price is right for JNJ, but with the drop in the Euro it has become increasingly expensive for us compared to when I picked it up a few months ago.
It’s a bit of yield chasing in my case but I figure JNJ needs to grow its dividend at 7% for almost 11 years just to match the current net yield of GSK. The strong dollar also makes me reluctant to invest in US shares with a relatively low net yield so I recently doubled my position in GSK instead.
I found it interesting that UBS recently went from bearish to bullish on GSK. A couple of months ago UBS called GSK’s dividend unsustainable but now they claim a flat 80p dividend out to 2020 is plausible as they see promising signs for renewed earnings growth. They believe GSK can achieve 2015E-18 EPS growth of 12 percent per year from a 2015 base of 87p, which would return the payout ratio to a more normal level.
Great post NMW. Lately, I’ve been thinking about adding more healthcare to my portfolio as I only have 7000 worth of JNJ out of a 500 k portfolio. That is lacking in my portfolio for sure. Thank you for your informative post my friend and keep up the great journey. Much love.
You made me laugh when I read “only have $7,000 worth of JNJ”! I wish I had that amount of JNJ in my portfolio! 😉
Seriously, though, if you’re portfolio is over $500k in size and JNJ is your only health care play, then I don’t think it’s a bad idea to add to the healthcare sector. There are so many other great health care stocks out there!
Great article, as the population ages more and more health care is needed. That’s why I’m very bullish on health care sector and health care REITs.
I’m glad you mention health care REITs as that’s one other sector that’s going to benefit from the explosion of retired and older people. I’ve been looking to buy into a good health care REIT in Belgium, but haven’t found to my liking yet.
Hope everything is well over there,
The big picture for the need of healthcare is fine. You wrote about the main drivers for that. But I think about the following points: (1) competition of comp., (2) goverment regulations and (3) low cost generic alternative medicaments. These can lower the overall margins of the healthcare companies. I am especially cautios about regulations, which can lead by an older getting society with smaller part of active workers, that healthcare cost explode. Maybe, goverment will not allow, that net margins of healthcare comp. get too high, on costs of all consuments.
If you have a large diversified portfolio, sure some great healthcare comp. like J&J are a good choice. But if you really focus on a few perls, I won’t buy a healthcare company.
You are absolutely right that the health care sector will face some headwinds like any other industry. Competition and low-cost generic drugs are two things many health care corporations have a pretty good handle on as they focus heavily on keeping their development pipeline filled with new stuff so patent expiration dates don’t eat up their profits.
A bigger problem is indeed increased government regulation in a number of countries as this is something that is mostly outside the control of these firms. Here in Europe there’s already quite a lot of regulation, but you can hear of some new policy initiatives here and there to reign in the excessive revenues and profits on some type of products. We can only wait and see, I guess.
And as always, diversification is key! I would never go all in on a couple of ‘hidden gems’. Established corporations with a wide moat are what I like best.
Best wishes and thank you for your valuable input,
To me, healthcare companies are quite a different kettle of fish to pharmaceuticals. The former I’d consider investing in, the latter I wouldn’t, although unfortunately they ate often wrapped up in the same company. I’m not a big fan for many reasons, partly because the healthcare system is broken in most countries, partly because I’ve worked for the National Health Service so I know how things work from the inside. I would potentially invest in health related companies like Baxter, Smith & Nephew and those sorts of companies who aren’t all about drugs, because it’s probably worthwhile to have some exposure to health related things. But I just see (at least, I hope) healthcare is going in a different way, less need for big pharma as people have greater access to information on nutrition and lifestyle, as well as new inventions and technologies and cures wiping out what was once a problem for many.
I do see that at present, big healthcare companies are almost like utilities, necessary and good dividend payers, so for those trains alone they could be a great part of your portfolio
I didn’t know there was such a big difference between pure health care players and pharmaceuticals in modus operandi. As you know I take ethics into consideration when I make an investment decision (up to a certain point, at least), so I’ll definitely look into what you just explained.
With that said, many companies providing health care services also have a division dedicated to drugs development. That’s why I believe it will be difficult to distinguish between the two. Other investments you could be looking at to avoid the pharma industry entirely would be health care REITs or companies providing the base materials for hospitals, like Air Liquide in France for example.
Also, did you see one of Top Gear’s latest episodes in which they try to help the NHS by inventing a new type of ambulance? 🙂
I fully agree with you and my favorite is Novo Nordisk which has a very long and good track record for creating shareholder value.
Half a Million,
Just read your (very detailed!) Novo Nordisk analysis. Seems like an excellent company and one I’ll be keeping an eye on from now on.
Your blog is a wealth of information, by the way. When I have some time I’m going to sit down and sift through everything you have to offer.
Pretty spot on there NMW – the population of many developed countries is ageing as people not only live longer but are having less/no children. The markets will shift to accommodate demand, in healthcare and in medicine. There are lots of ‘retirement villages’ being built in the UK, luxury apartments to cater for folk who have downsized, so property continues to be good to invest in.
Haha, retirement villages! Kinda sounds like you are trying to put old people in some type of ghetto! 🙂
Those properties will probably be already expensive as the demand for it is calculated in the price, no? I would consider investing in a REIT that manages a ton of these luxuy apartments, but never invest my money directly. Unless I could go and live in them because, well, who doesn’t love a luxury apartment?
Couldn’t agree more. Probably why my largest single investment is JNJ.
One can’t really not purchase healthcare products when they’re necessary to sustain or save one’s life. And the demographic tailwinds are massive and enduring.
I hope to add more exposure to the healthcare exposure as I move along. It’s really one of my favorites.
Glad you agree! I can’t think of too many things that sounds better than JNJ being your largest single investment – I’m kinda jealous now.
The “necessary or sustain life” argument is one I didn’t really think of yet. People will do about anything to cling on to health and life, so it makes sense that someone somewhere is going to capitalise on that. Why not enjoy that effect by being a shareholder, right?
Looking forward to your next health care purchase!
I am definitely looking to boost my health sector exposure for basically all the same reasons you mention. Right now my holdings in the space include, JNJ, BCR, BDX, ABBV, ABT and HYH. I am also looking to get into the health REIT space with an eye on HCP, VTR and OHI. There’s no question that this will be a growing sector for decades to come as the gray population continues to grow. Thanks for sharing.
That’s a pretty impressive list of health care related stocks already! Adding health REITs to your portfolio will round out your existing positions nicely, I think. You can’t really go wrong with your approach… In a few year’s time we’ll see massive gains from all of those investments, I’m sure.
I’ve come to the same realization. A growing population is an aging population. Along with drug companies are also health care REITs like HCN and OHI that offer assisted living facilities and have a good yield
Ha, glad to have you on board! 🙂 A growing population is not an ageing population per se (look at India, for example), but I get what you mean. Just like you some other commenters above have pointed out that it’s not just pure health care plays that will be benefiting, but also REITs. I fully agree!
Great article. I agree with your thoughts. I was fortunate to work at Abbott for nearly 10 years. Healthcare companies are a great place to work and invest. They really are close to recession proof evidenced by the fact that we kept on growing through the Great Recession. I have decided on GSK, JNJ and AMGN for my portfolio.
It makes sense that Abbott kept growing during the recession as people won’t skimp out on health and medicine even when money is tight. That’s what makes health care companies such a great defensive investment.
Great first picks for your portfolio!
Healthcare stocks are spot on. For American economy, as the last of the baby boomers retire, the demand from healthcare, nursing home care, pharmaceutical increase. People are living longer, therefore more longterm maintenance care.
My only thing is I can buy an index fund that have healthcare stocks, but I don’t want to buy individual stocks, as I see it conflict of interest with my work. I would like to work with a cool head, do t think about money or any benefit if I make a decision at work.
Goodluck makinf your choices.
Buying a health care ETF or a similar investment vehicle would be a great idea too of course in stead of picking up individiual stocks, especially if there’s a conflict of interest at work.
There are so many companies out there that stand to benefit from future health care needs that we can’t possible buy them all. I even have my eye on Air Liquide from France. They actually classify in the materials sector, yet provide mostly for health care companies, hospitals, etc.
Best of luck to yourself,
They say that there’s only 2 certain things in life and that’s death and taxes. But I think you may have found a 3rd here, medical expenses. I guess that you could argue that medical expenses may lead up to death, but let’s not argue semantics here.
Right now I have limited exposure to health care but I have built it up more recently since JNJ did sort of pull back a little recently. Definitely a solid area to invest in since it won’t go away.
Haha, that expression is leaving a lot of certain things out! 🙂 Medical expenses definitely are a key part of everyone’s life. I yet have to meet the first person that hasn’t been sick.
With JNJ’s recent pullback it’s been a great oportunity for most investors to increase their exposure. If the Euro hadn’t declined so much over the past few months I would probably be adding to JNJ too at the end of the month. Now there’s better choices this side of the Atlantic for me.
Great post. I love health care stocks and big pharma! Population is increasing, margins are great. Its a no brainer.
Thanks, buddy! Health care is indeed a no brainer from many perspectives.
Glad to have you in my corner,
I agree on all of your points. DivHut put up an article recently on trash collection industry. Similarly, both of these industries are going to stay around for a long time for a variety of reasons With medical industry, there will be some bumps in the road possible as the industry itself is under way more scrutiny and political changes (esp. in the USA). However, those bumps will be minor and for us hopefully create some noise to buy on dips.
Long JNJ in this field,
Trash collection is yet another great example of a sector that definitely won’t go away! Of course, there will always be bumps in the road and reasons to transform your business model, but those changes won’t impact the future of these companies too much. They’ll adapt and find other ways to remain profitable.
Glad to be a fellow shareholder of JNJ.
Great perspective NMW, I like the way you’re thinking about this – although I’d still want to make sure I’m paying a reasonable price for healthcare stocks. That’s probably easier said than done though, because some of them have truly great growth prospects and deserve to be trading on the high valuations they currently are. The biggest holding in my portfolio is a healthcare stock (Resmed), as is my star performer on ‘Speculative Island’ (Nanosonics).
Also great to be investing in businesses that genuinely make people’s lives better 🙂
Investing doesn’t have to be hard in my book. A reasonable dose of common sense goes a long way! 🙂
As a result of the sector’s potential in the future, cheap health care stocks will be a rare find. The only one I can think of is GSK because of its compressed earnings lately, but it won’t stay that long this way. I think GSK will see rapid improvement over the next couple of years.
I’ve never ehard of Resmed or Nanosonics, but I’ll definitely check them out now!
I am currently starting to research on what to invest my money into once I become debt free and I have been hearing through the grapevine that healthcare companies are a great place to invest your money with. I just hope that once I get started the rumors will be true. Thank you so much for the information.
Although the grapevine might hold some truth to it, never trust rumours! I hope you take the time to do your own research and decide on what’s best for you and adjust your portfolio allocation accordingly.
Glad you found my information useful though.
Be careful and make sure you’re not getting into ASCs or Home health where HC costs are major threats to companies! Also look out for ICD-10 exposure!
I haven’t got a clue as to what ASC or ICD-10 stand for, so it’s unlikely that I’ll get into investments that deal with them. 🙂 As you can probably guess from this posts, I like my investments to be easy-to-understand and as simple as possible.
Hi NMW! I agree, im starting to love the health care stocks too. I hold JNJ (like everyone else) and Im keeping an eye out for valeant pharmaceuticals which although is at the peak, still seems underpriced to me. I will be looking to diversity my portfolio more with stocks in this sector. 🙂
Great to hear you’re such a big fan of health care stocks too! And glad to be fellow shareholder of JNJ, just like everyone else in our little community it seems.
I haven’t heard of Valeant, so I’ll definitely look into them soon. Hope you find some room to add it to your portfolio soon!
The sector doesn’t offer much value right now. Waiting for it to calm down.
You’re right that it’s rather expensive, but I don’t think that will change anytime soon. I don’t mind buying expensive stocks if I believe they’ll continue to do well, which most health care giants will without a doubt.