AstraZeneca plc, Smith & Nephew plc And Genus plc: Buy, Sell Or Hold?

What will 2016 and beyond have in store for AstraZeneca plc (LON: AZN), Smith & Nephew plc (LON: SN) and Genus plc (LON: GNS)?

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With the outlook for the global economy being highly uncertain, health care companies are continuing to be popular among investors. That’s because they offer excellent diversification for private investors, since their performance is less cyclical than for most of the FTSE 350’s constituents.

Furthermore, with health care spending across the globe rising as populations in the emerging world grow in size and wealth, while in the developed world an ageing population becomes a reality, the profitability of health care companies appears to be heading northwards.

Of course, some health care companies also provide stability and resilient earnings figures, too. For example, wound management and surgical devices company Smith & Nephew (LSE: SN) has posted a rise in its bottom line in each of the last five years and, looking ahead, is expected to do the same in 2016. This highlights the consistency that the health care space can offer and, with Smith & Nephew trading on a price to earnings growth (PEG) ratio of 1.9, such resilience appears to be very reasonably priced.

Undoubtedly, Smith & Nephew remains a relatively low-yielding stock at the moment, with its yield currently standing at just 1.7%. A key reason for this is its low payout ratio, with just 37% of profit being paid out as a dividend. This provides an opportunity for the company to boost investor sentiment with strong dividend growth at a time when interest rates are set to remain low. And, with Smith & Nephew set to raise shareholder payouts by 8.7% next year, it could become a sound income play over the medium term.

When it comes to dividends, though, AstraZeneca (LSE: AZN) appears to hold more appeal than Smith & Nephew. That’s because it currently yields 4.1% and, with its bottom line expected to record positive growth over the medium term as its acquisition strategy begins to make a real impact on its financial performance, dividend rises could be on the horizon.

Clearly, AstraZeneca is a far less stable investment opportunity than Smith & Nephew. That’s because of the nature of the pharmaceutical segment, where patent expiries and generic competition equate to large ups and downs in profitability. However, even taking this risk into account, AstraZeneca’s price to earnings (P/E) ratio of 16.1 indicates excellent value for money. With an improving pipeline, excellent cash flow and a strong balance sheet, AstraZeneca appears to be a long term buy.

Meanwhile, animal genetics company Genus (LSE: GNS) has enjoyed a very positive 2015, with its shares rising by 16% since the turn of the year. This puts them on a relatively high P/E ratio of 24.8 and, with Genus forecast to increase its bottom line by just 3% this year, its valuation may not move upwards at the same rate as it has done in the past.

Furthermore, Genus yields just 1.5% and, while dividends per share have risen by 10% per annum during the last five years, it appears to lack the income appeal of AstraZeneca as well as the stability of Smith & Nephew. For example, Genus’ bottom line has declined in two of the last five years. As such, and with the likes of its two health care peers being highly appealing at the present time, there appear to be better options available elsewhere, even though its recent AGM statement indicated that it is trading in-line with expectations.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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