This is a guest contribution by Ben Reynolds of Sure Dividend.
With a new year comes an examination of our lives. Many people start new year resolutions. Others review the previous year and plan the coming year.
Analyzing your portfolio for the new year is important as well.
Are there stocks that you should sell? What stocks should you buy for 2017? This article takes a look at my 3 favorite dividend growth stocks.
They are all in the health care sector. The health care sector was virtually flat over 2016 – despite growing earnings. In contrast, the S&P 500 gained in double digits over 2016.
This means that the health care sector is a good place to look for bargains to start 2017. Without further ado, my 3 favorite stocks for 2017 are analyzed below. All of these stocks rank as buys using The 8 Rules of Dividend Investing.
#3: Johnson & Johnson
Johnson & Johnson (JNJ) is the largest health care stock in the world. The company currently has a market cap of $316 billion.
J&J has an impressive corporate history. The company was founded in 1886 – and has increased its dividend payments for 54 consecutive years. This makes J&J a Dividend King – one of only 18 stocks with 50+ consecutive years of dividend increases. Even more impressive, the stock has realized 32 consecutive years of adjusted earnings-per-share growth. This is perhaps the most impressive streak of earnings growth in corporate America today.
J&J’s stability comes from its diversified operations. The company operates in 3 multi-billion dollar segments:
- Consumer
- Medical Devices
- Pharma
Of the 3, the Pharma segment is the largest.
J&J posted strong results in its most recent quarter. Adjusted earnings-per-share grew 12.8% versus the same quarter a year ago. J&J’s management is expecting ~8% adjusted earnings-per-share growth for fiscal 2016 (results will be out in mid to late January).
J&J has grown its earnings-per-share and dividends at 4.6% and 8.7% annualized rates over the last decade, respectively. I expect J&J to continue growing earnings-per-share at between 6% and 8% a year over the long run. This growth will be driven through share repurchases and pharmaceutical growth. J&J currently has 11 pharmaceutical products in its pipeline that each have the potential to generate $1 billion+ in annual sales.
The company’s 2.8% dividend yield combined with its expected growth rate gives investors expected total returns of 8.8% to 10.8% a year going forward.
What makes J&J a compelling buy for 2017 is its reasonable valuation. The company has an adjusted price-to-earnings ratio of around 18. I believe a price-to-earnings ratio of 20 is appropriate for the company in today’s low interest rate environment. J&J is an excellent example of a high quality business trading at a fair (or better) price.
Dividend Guys’ note: Johnson & Johnson (JNJ) stock fair value is calculated at $128.11 by our Dividend Stocks Rock valuation service.
#2: Cardinal Health
There are 3 large drug distributors in the United States:
- Cardinal Health (CAH)
- AmerisourceBergen (ABC)
- McKesson (MCK)
The drug distribution industry is characterized by its razor-thin margins. Cardinal Health has a gross margin of just 5%. This means only the largest and most efficient players in the industry can survive – which creates significant barriers to entry.
The 3 large drug distributors together have an 85% market share in this important industry. Of the 3, Cardinal Health stands out due to its shareholder friendliness. The company has a dividend yield of 2.4% and has paid increasing dividends for 31 consecutive years. The company’s long dividend history makes it a Dividend Aristocrat – a group of 50 S&P 500 stocks with 25+ years of consecutive dividend increases.
Cardinal health is one of my top picks for 2017 not because of its dividend history (though that certainly helps) – but because of its value. Cardinal Health stocks appears to be significantly undervalued.
The company is currently trading for an adjusted price-to-earnings ratio of 14.5. The company’s historical average price-to-earnings ratio over the last decade is 17.3. Cardinal Health’s stock is looking cheap at a time when the overall market is expensive. And there’s a reason for that…
Cardinal Health posted mixed results in its most recent quarter. The company saw revenue surge 14%… But adjusted earnings-per-share fell 10%. The company also reduced its fiscal 2017 earnings-per-share guidance from a range of 5% to 9% to a range of 3% to 7%. A price war amongst the big 3 has damaged results in the short run.
Over the long run, however I expect Cardinal Health to deliver double-digit total returns. Now is an excellent time to buy into this high quality dividend grower when the it is out of favor.
#1 – AbbVie
AbbVie (ABBV) is my top choice right now for 2017. The company was created at the beginning of 2013 when Abbott Labs (ABT) spun-off its biopharmaceutical business. AbbVie currently has a market cap of around $100 billion. The company is the world’s largest biopharmaceutical business.
AbbVie is a shareholder friendly business. The company hiked its dividend 12.3% back in October – and has grown dividends every year since being spun-off from Abbott Labs. AbbVie currently has a 4.1% dividend yield. Investors are being ‘paid to wait’ for the company’s stock valuation to catch up to its underlying value…
AbbVie stock is currently trading for a price-to-earnings ratio of just 13.4. For comparison, the S&P 500 has a price-to-earnings multiple of 26. But AbbVie has strong growth prospects.
The company’s management is expecting 14% annualized earnings-per-share growth over the next several years. This level of growth from a large cap is very impressive – and I believe a bit optimistic. I expect AbbVie to grow earnings-per-share at 10% to 12% a year over the next several years. This growth combined with its 4% dividend yield gives investors expected total returns of 14% to 16% a year.
You may be wondering why a company with strong growth prospects and a shareholder friendly management is trading for such a low price-to-earnings ratio. Here’s why – the company is facing a patent cliff.
AbbVie generates ~60% of its revenue from Humira. Humira patents began expiring at the end of 2016. AbbVie’s management will ‘vigorously defend’ its intellectual property from competitors. In fact, Humira sales are actually expected to slowly increase through 2020 as it continues to expand globally and is approved for alternate uses. This is a case where perceived fear does not match reality. AbbVie appears to be an absolute high yield bargain at current prices.
The healthcare sector is providing some great opportunities to invest in for the coming year. JNJ is a very solid core stock of which many dividend investors probably own a piece of. Abbvie also looks quite appealing, although I started buying into Gilead early 2016, who shares a similar story with their top product: Harvoni and Sovaldi. So I will probably just stick with them.
I’m also following Allergan closely as they are starting to pay dividends, with the first payment in February.
Great Post. I’m currently already in JNJ and CAH and they have been doing good for me even with the flatness in 2016. I’ll be sure to take a look at ABBV in the coming year. Thanks!