Achieving long-run success as an investor is probably simpler than most people realize. You don’t have to be a Ph.D.-level economist; buying quality businesses in growing industries at reasonable valuations and holding them for the long haul will do.
The pharmaceutical and health insurance industries are two of the more reliable business sectors because a supermajority of consumers regularly partakes in their goods and/or services. Here are two proven stocks that are interesting buys now and could make shareholders richer in the years ahead.
1. Merck: A world-class pharmaceutical company
Merck (NYSE: MRK) is among the most dominant drugmakers in the world. The company’s $282 billion market capitalization positions it as the third-biggest drug manufacturer on the planet behind Johnson & Johnson and Eli Lilly.
Merck is most known for its star oncology drug, Keytruda, which brought in nearly $21 billion for the company in 2022. But with the popular medicine contributing just 35% of its sales last year, the company is so much more than Keytruda: Merck’s product portfolio includes the megablockbuster (i.e., $5 billion or more in annual sales) human papillomavirus vaccine Gardasil and the COVID-19 antiviral therapy Lagevrio. Other blockbuster products (e.g., $1 billion-plus in annual sales) are the diabetes medicines Januvia/Janumet, the measles/mumps/rubella/varicella virus vaccine franchise Proquad, the general anesthetic Bridion, and a cancer drug co-owned with AstraZeneca called Lynparza.
With over 110 programs in phase 2 or 3 clinical trials and more than 10 programs currently being reviewed by regulatory authorities, Merck’s future looks as bright as its past. This is why analysts are expecting 8.9% annual non-GAAP (adjusted) diluted earnings-per-share (EPS) growth from the company over the next five years. That’s meaningfully above the drug manufacturing industry’s average earnings growth projection of 6.7% each year.
Besides its above-average growth prospects, Merck also pays an above-average dividend. The stock’s 2.6% dividend yield is significantly higher than the S&P 500 index’s 1.7% yield. And since Merck’s dividend payout ratio is poised to be in the low-40% range for 2023, income investors can rest assured that the dividend is quite safe.
The stock’s valuation seals the deal to make it a buy. This is because Merck’s forward price-to-earnings (P/E) ratio of 13 is in line with the drug manufacturing industry average forward P/E ratio of 13. Buying a fast-growing business at a valuation multiple in line with that of its peers is a bargain, in my opinion.
2. Elevance Health: A fast-growing business
With a $110 billion market cap, Elevance Health (NYSE: ELV) is the biggest health insurer on earth not named UnitedHealth Group. Nearly 120 million customers use its health services and health insurance plans.
The rising prevalence of chronic medical conditions throughout the world and an aging global population are two favorable factors for Elevance Health. This is how the company was able to record $156.6 billion in total revenue in 2022, which was up 13% over 2021.
Looking out over the next five years, analysts believe that the promising global health insurance industry forecast will lift Elevance Health’s profits. Analysts expect 12.4% annual adjusted diluted EPS growth, which is close to the healthcare plan industry average earnings growth outlook of 12.5%.
Elevance Health’s 1.3% dividend yield isn’t appealing to income investors compared to the S&P 500 index’s 1.7% yield. But with the dividend payout ratio set to clock in around 18% in 2023, the stock is more of a dividend growth play than an immediate income pick anyway.
Elevance Health’s forward P/E ratio of 12.8 is just below the healthcare plan industry average forward P/E ratio of 13.5. This lowly valuation makes the stock a great pick for dividend growth investors.
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Kody Kester has positions in Johnson & Johnson, Merck, and UnitedHealth Group. The Motley Fool has positions in and recommends Merck. The Motley Fool recommends Johnson & Johnson and UnitedHealth Group. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.