Healthcare companies have been star performers for many portfolios since the GFC. The companies are well regarded due to their defensive nature, reliable income and sticky customer base (because patients will often stay with what works).
They are less-known however, for their dividend yields, as a large proportion of earnings are retained by the business to develop new drugs, treatments or devices in order to maintain market share or grow earnings in the future. As a result, many long-term investors in these companies are often less interested in dividend yield and more in share price appreciation over time.
But I suspect things are changing. With term deposits now yielding between 2.5% and 3% before tax, the yields on some of Australia's best listed healthcare companies are becoming attractive for investors mainly interested in yield. Here are three companies with attractive futures that are growing their dividend payouts.
One company known for its strong history of earnings and dividend growth is CSL Limited (ASX: CSL). The blood-product company delivered a 3% rise in profit and recently announced a 21% increase in dividend payout to 59 cents per share for this half. The company continues to grow and develop new products, but is rarely cheap; so even with the big jump in payout it is now yielding only 1.7% with no franking credits.
Primary Health Care Limited (ASX: PRY) on the other hand is looking a bit cheaper, having dropped 6% this year. It's currently trading on a price-to-earnings ratio of 15 and recently announced that for the half to 31 December, it had increased net profit by 8.6% and would raise its interim dividend by 38% to 9 cents per share. This should take the full-year payout to around 19 cents per share, or a yield of 4% fully franked, which is equivalent to 5.6% grossed up.
Finally, shareholders of hearing device maker Cochlear Limited (ASX: COH) have had a rough time of late as regulatory approval delays and adverse lawsuit results have pushed the share price down over 20% in the last 12 months. Things are starting to look up now and at the current price you can buy 20% more of the company with the same amount of money as a year ago! Additionally, while profit dropped by 53% in the 6 months to 31 December, the company's management is so confident in the strength of its financial position looking forward, that it announced a 2% increase in its half-year dividend to 127 cents per share. This corresponds to a yield of 4.5% franked to around 15%, or 4.8% grossed up.
Foolish takeaway
Quality healthcare companies rarely look cheap but have a history of providing solid capital gains over the longer term. While the payout ratio of healthcare companies is often low, dividends are important for providing a small boost to returns, especially during years of slower share price gains in between product launches. The three companies mentioned above are quality companies and, with the exception of Cochlear for the time being, are growing earnings and dividends which should result in long-term share price appreciation for shareholders.
