This ASX 200 healthcare share could be a great way to defend against volatility

This leading healthcare stock has built an impressive defensive record.

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Key points

  • Sonic Healthcare is one of the largest pathology businesses in the Western world
  • It’s seeing steady growth in its core business and is also growing through acquisitions
  • As well, the company has been steadily growing its dividend for investors

The S&P/ASX 200 Index (ASX: XJO) healthcare share Sonic Healthcare Ltd (ASX: SHL) may be able to demonstrate defensive earnings and share price resilience against volatility.

Investors often like to judge a business against its profitability — and the potential of future hits to profit. I believe healthcare is one of the most defensive sectors. After all, people don't choose when to get sick and the sector is helpfully funded by both the government (Medicare) and insurance (private health insurers).

With that earnings profile in mind, global pathology giant Sonic could be a good one to consider.

Global diversification

When one business has all its earnings generated from one country, it's heavily reliant on that country's economic climate.

However, Sonic Healthcare generates good revenue from multiple countries. In its FY23 first-half result, both the US and Australia generated more than $1 billion in revenue. Germany saw $774 million in revenue, Switzerland made $287 million, the UK generated $284 million, and Belgium accounted for $74 million in revenue.

In recent times, the ASX 200 healthcare share has been using its excess cash flow to make acquisitions. For example, near the end of April 2023, Sonic acquired German business Medical Laboratories Dusseldorf which is expected to make revenue of €50 million in FY24. The purchase price for the business was €180 million. It has a 24/7 central laboratory, as well as several branch and hospital sites across the Dusseldorf metropolitan region.

Organic growth and operating leverage

Sonic Healthcare isn't just growing through acquisitions though. Its base business (which excludes COVID testing revenue) is growing at a pleasing rate, which then naturally helps profit.

In the FY23 first-half result, Sonic's base business saw organic revenue growth of 6% year over year. In January 2023, the company's organic revenue growth was 14% year over year.

While HY23 saw COVID-19 testing revenue roll off, it also showed how much more profitable the business is compared to pre-COVID times.

HY23 base business revenue compared to (pre-COVID) HY20 was up 11% while operating cash flow was up 47% and net profit after tax (NPAT) was 50% higher.

I think the company will be able to keep growing revenue in FY24, which will then help push profit higher thanks to its operating leverage.

Sonic has talked about catch-up testing following COVID-19 delays, so there could be stronger growth in 2023 for base business revenue compared to 2021 and 2022.

Growing dividends from Sonic Healthcare shares

The passive income from the ASX 200 healthcare share may make up a relatively small part of the return, but it's important and can provide stable (and growing) returns for investors, regardless of what the Sonic share price is doing.

Sonic has a stated "progressive dividend policy" and it has increased its dividend every year since 2013.

In FY24, according to Commsec, it's projected to pay an annual dividend per share of $1.06 per share. That would be a grossed-up dividend yield of 4.3%.

Foolish takeaway

I'm optimistic about the company's future, including the investment and partnerships with artificial intelligence business Harrison.ai and microbiome testing and therapeutics business Microba Life Sciences Ltd (ASX: MAP). That said, I'm not including these two factors in my thoughts about the business yet.

Certainly, I think it's one of the most defensive businesses on the ASX.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Sonic Healthcare. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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