Medical centre operator Primary Health Care (ASX: PRY) is out today with a trading update. The update raises guidance for earnings per share (EPS) growth of 24% to 29% from a previous range of 20% to 25% growth. This implies for the full year, diluted EPS will be between 28.9 cents and 30 cents, placing the stock on a forward price-to-earnings (PE) multiple of 17.5 times.
Last financial year, Primary paid an interim dividend of 5 cents per share (cps) and a final dividend of 6 cps. At the latest half, the interim dividend increased 30% to 6.5 cps. Given the earnings upgrade, there is a good chance that the upcoming final dividend could be raised by at least 30% as well; implying a final dividend of 7.8 cps. This would put the current running yield of Primary at 2.8%, which is roughly in line with its peers.
Other health sector stocks favoured by investors for their defensive characteristics and consistent dividends include blood plasma biotech CSL (ASX: CSL), bionic ear manufacturer Cochlear (ASX: COH) and private hospital operator Ramsay Health Care (ASX: RHC). The chase for yield has pushed the share prices of the above three stocks to dizzying heights, with all three trading on hefty earnings multiples in the mid-to-high 20s. The multiple expansions have pushed their yields down to a point where their trailing yields are 1.5%, 3.6% and 1.9% respectively.
Foolish takeaway
Dividends are a very important contributor to overall investment returns and so it is prudent to consider not just the capital gain potential but also the yield on an investment. It is dangerous however to only consider the yield when purchasing an investment without considering a conservative valuation of the company.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur owns shares in Primary Health Care.
