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Healthy earnings and dividend growth

Christine St Anne  |  07 Nov 2012Text size  Decrease  Increase  |  

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Christine St Anne is Morningstar's online editor.

 

Healthcare stocks are traditionally described as being "defensive". These businesses are often stable in challenging economic conditions.

Many of these companies also possess growth prospects that enable them to increase total shareholder return. This was a theme highlighted in a recent report on the sector by Morningstar head of equities research Peter Warnes.

His analysis of four healthcare companies found that compounded growth in both earnings per share and dividends per share for both five and 10 years "would comfortably blow many perceived growth sectors away".

Warnes says companies like Cochlear (COH), CSL (CSL) and ResMed (RMD) have all grown from humble beginnings to become new global industry leaders - a feat not normally achieved by many Australian companies.

Warnes says these companies should be well-positioned to deliver shareholder value over the longer term.

 

Blue skies

Share traders have been attracted to the latest performance by the healthcare sector. The sector has risen 35 per cent in value over the year and is currently trading at all-time highs, according to share trader Justine Pollard.

Pollard says the strength behind the sector's move is attributable to the stock with the highest market capitalisation in the sector, CSL, which has risen 48 per cent throughout the year and broke "into blue-sky territory at the end of August". The stock is currently trading around the high $40 levels.

Pollard is a professional stock trader with a 20-year track record. Her recent analysis highlights a number of "hot" sectors, one of which is healthcare. Although there are a number of healthcare stocks, including CSL, which are trading at relatively high levels, Pollard says there are other stocks that can move higher.

For a number of fund managers, a more fundamental analysis has found the sector is attractively priced and is positioned for long-term growth, as noted earlier by Warnes.

Healthcare will continue to benefit from an ageing population and increased healthcare spending in both developed and developing countries, Alphinity portfolio manager Johan Carlberg says.

Hyperion head of Australian equities Joel Gray also expects healthcare to continue to grow on the back of an ageing population.

Despite the sector not being as attractively priced as 12 months ago, Gray says many companies operating in this sector operate as an oligopoly, giving them competitive advantages that will allow them to continue to boost their profits.