Few sectors are as resilient in an uncertain environment as healthcare. Medicines and health insurance are essential for the well-being of patients. Put simply, people need them. And with the world’s growing geriatric population, there’s reason to believe these healthcare items will only become more essential over time.
health insurer Elevance Health (ELV -1.05%) and pharmaceutical companies Novartis (NYSE: NVS) are two dominant healthcare stocks that should be considered as a buy to play with sector inelasticity.
1. Elevance Health
If you haven’t heard of Elevance Health, that’s because it was formerly known as Anthem – until it was rebranded under its new name in March. Either way, it’s a sizable company, with 47.1 million medical members and another 22.6 million enrolled in life, disability, dental, vision, and Medicare Part D coverage.
For comparison, the company’s market cap of $113 billion makes it the second-largest pure-play health insurer behind it United Health Group‘s (NYSE:UNH) Market capitalization of $471 billion. And given the encouraging prospects for the global health insurance industry, it’s one of the best industries in which a company could be an established leader.
That’s because of the growing geriatric population, which requires a high level of monitoring and medical care. About 10% of the world’s population is over the age of 65, which is often classified as geriatric. According to market research firm Global Market Insights, the global health insurance market could grow at an annual rate of 4.6% from US$2.8 trillion in 2020 to US$3.9 trillion in 2027.
Elevance converted its first-half revenue of $76.7 billion to net income of $3.5 billion. That translates to a net margin of 4.5%, showing that the health insurer is a profitable business. That’s why analysts believe Elevance will benefit from growing demand for health insurance over the next five years, with annual earnings growth of 11.9%. For comparison, that’s just a little short of the healthcare plan industry’s 12.6% annualized earnings growth forecast.
The company’s dividend yield of 1.1% is moderately lower than that S&P500 Index return of 1.6%. But with the 2022 dividend payout ratio expected to be below 18%, the health insurer’s dividend growth should offset the lower initial yield. That explains why I think Elevance Health’s dividend will grow at a compound annual rate of teens for the next five to 10 years.
Best of all, the health insurer can be bought at an expected price-to-earnings (P/E) ratio of 14.8. This is slightly below the industry average of 16.1, making Elevance Health a compelling asset compounder.
The global pharmaceutical industry is expected to grow from US$1.4 trillion in 2021 to US$1.8 trillion in 2026 due to an aging population and the introduction of new drugs to treat rare diseases. As one of the biggest players in the world, Swiss-based company Novartis will doubt it will benefit from this trend.
The company’s portfolio consists of 13 drugs that are on track to generate at least $1 billion in sales by 2022. That includes immunology drug Cosentyx and heart failure drug Entresto, which posted first-half sales of $2.4 billion and doubled $2.2 billion at double-digit growth rates. Based on this impressive portfolio of drugs, analysts expect sales of Novartis to be $52.4 billion this year.
And with 150 projects currently in various stages of clinical development, the company’s future looks bright. Future drug launches will more than offset revenue losses from upcoming patent expirations, leading analysts to forecast annual earnings growth of 4.1% over the next five years.
Novartis’ dividend yield of 4.1% is almost three times the yield of the S&P 500 Index. With a projected payout ratio of just under 50%, the company shouldn’t have trouble growing its dividend further for years to come.
And investors looking for passive income can pick up shares of Novartis for a price-to-earnings ratio of 12.3, which is just above the industry average of 10.7 — and hardly an unreasonable premium for a world-class pharmaceutical stock like Novartis.