What are we looking for?
U.S. health-care companies with strong economic indicators (economic value added), high free cash flow generation and above-average dividend growth rates.
The screen
We screened U.S. health-care companies, focusing on stock performance from both an economic and accounting perspective. Our screen had the following parameters.
- An economic performance index, or EPI (return on capital divided by cost of capital) above 1.0. An EPI ratio of 1.0 or more indicates a company’s capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
- A positive free-cash-flow-to-invested-capital ratio. Free cash flow indicates the amount of cash the company generates, which could be used to stimulate growth, pay and/or increase dividends, reduce debt, etc.;
- A five-year average dividend growth rate of 5 per cent or more.
The trailing 12-month dividend yield and three-month price performance are displayed for informational purposes.
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA (economic value added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.
What did we find?
Eleven U.S. health-care companies are identified by our screener.
This sector has been one of the most volatile in the past three months, and the Dow Jones U.S. health-care index has lost close to 9 per cent over that period. The Valeant Pharmaceuticals saga certainly helped in triggering this broad sell-off, but we think many quality companies got dragged down for no specific reason, creating interesting buying opportunities.
Strong names such as Becton Dickinson and Co., UnitedHealth Group, Johnson & Johnson, Cardinal Health, Quest Diagnostics Inc. and Aetna Inc. have never lowered their dividends in the past 10 years or more, and offer outstanding economic profits for the shareholders.
There might be short-term pressure on this industry, but easier U.S. access to health care – as a result of Obamacare – combined with a quickly growing cohort of seniors still make the big picture quite attractive.
Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Jean-Didier Lapointe is a financial analyst for StockPointer at Inovestor Inc.