Few sectors are as resilient in uncertain environments as healthcare. Indeed, medicines and health insurance are essential to the well-being of patients. In other words, people need it. And given the expanding global geriatric population, there’s reason to believe that these health items will become even more indispensable over time.
Health insurer Elevance Health (NYSE: ELV) and pharmaceutical company Novartis (NYSE: NVS) are two dominant healthcare stocks to consider buying to play on the inelasticity of the sector.
1. Elevance Health
If you haven’t heard of Elevance Health, that’s because it was known as Anthem — until it rebranded to its new moniker in March. Whatever its name, it’s a big business with 47.1 million medical members and an additional 22.6 million who have life, disability, dental, vision, and Medicare Part D coverage.
For context, the company’s $113 billion market capitalization makes it the second-largest pure health insurer behind UnitedHealth Groupit is (NYSE:UNH) market capitalization of $471 billion. And given the encouraging outlook for the global health insurance industry, this is one of the best sectors in which a company could be an established leader.
This is because of the growing geriatric population, which requires a high degree of medical supervision and care. About 10% of the world’s population is over the age of 65, which is often classified as geriatric. This is a large part of the reason why the global health insurance market could grow by 4.6% per year, from $2.8 trillion in 2020 to $3.9 trillion by 2027, according to the market research company Global Market Insights.
Elevance converted its $76.7 billion in first-half revenue into $3.5 billion in net profit. This equates to a net margin of 4.5%, demonstrating that the health insurer is a profitable business. That’s why analysts believe Elevance will capitalize on the growing demand for health insurance with annual earnings growth of 11.9% over the next five years. For context, that’s just slightly below the health plan industry’s average annual earnings growth projection of 12.6%.
The company’s 1.1% dividend yield is moderately below the S&P500 return of 1.6% of the index. But with a dividend payout rate expected to be below 18% in 2022, the health insurer’s dividend growth should offset its lower starting yield. This explains why I believe Elevance Health’s dividend will grow at an annualized rate among teens over the next five to ten years.
Even better, the health insurer can be bought at a forward price-to-earnings (P/E) ratio of 14.8. That’s slightly below the industry average of 16.1, making Elevance Health a must-buy wealth ingredient.
Due to an aging population and new drug launches to treat rare diseases, the global pharmaceutical industry is expected to grow from $1.4 trillion in 2021 to $1.8 trillion in 2026. As one of the biggest players in the world, the Swiss company Novartis will undoubtedly benefit from this trend.
The company’s portfolio consists of 13 drugs that are on track to generate at least $1 billion in sales for 2022. These include immunology drug Cosentyx and heart failure drug Entresto, which generated $2 billion. $.4 billion and $2.2 billion in first-half sales with double-digit growth rates, respectively. This impressive portfolio of drugs is why analysts expect Novartis to earn $52.4 billion in revenue this year.
And with 150 projects currently in various stages of clinical development, the company’s future looks bright. Future drug launches will more than make up for lost revenue from upcoming patent expiries, which is why analysts forecast annual earnings growth of 4.1% over the next five years.
Novartis’ 4.1% dividend yield is almost triple the yield of the S&P 500 index. coming years.
And investors looking for passive income can buy shares of Novartis at a P/E ratio of 12.3, which is just above the industry average of 10.7 – and barely an unreasonable premium to pay for a world-class pharmaceutical stock such as Novartis.
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Kody Kester holds positions within the UnitedHealth Group. The Motley Fool recommends 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.