The outlook for the global economy may be bright, but it’s also uncertain. US interest rate rises, the US election and Brexit all loom on the horizon and could cause investors to move towards a more risk-off mentality. That’s a big reason why healthcare has huge appeal at the moment due to its defensive characteristics.
GlaxoSmithKline
For example, GlaxoSmithKline (LSE: GSK) is an exceptionally well-diversified business. It has three world-class divisions: consumer goods, vaccines and pharmaceuticals and this reduces its risk profile. It means that disappointment in one segment can be offset by strong performance elsewhere and with GlaxoSmithKline having a pipeline of around 40 potential treatments, the company offers excellent growth prospects, too.
In fact, it’s forecast to increase its earnings by 7% next year. This will boost its dividend coverage ratio, which will make its shareholder payouts more sustainable over the long run. On this topic, the company yields 4.7% from a dividend covered 1.3 times by profit. Although dividends aren’t due to rise over the next couple of years, beyond that GlaxoSmithKline’s growth potential indicates that shareholders will be rewarded through higher dividends in the long run.
Shire
While Glaxo offers top-notch income potential, Shire’s (LSE: SHP) yield of 0.4% holds little appeal for income seeking investors. However, this could change over the long run. A key reason for that is Shire’s combination with Baxalta, which is set to provide synergies and a more robust pipeline.
The deal is forecast to boost Shire’s bottom line, with growth of 18% forecast for next year. This puts Shire on a price-to-earnings growth (PEG) ratio of 0.7, which indicates that it offers strong growth at a very reasonable price.
This growth potential is set to catalyse Shire’s dividend payouts. They’re forecast to rise by 22% next year and while this doesn’t suddenly make Shire a top-notch income play, the fact that its dividends are covered 14.8 times by profit indicates that its shareholder payouts could be at the start of a period of significant growth.
Advanced Medical Solutions
As well as those two, Advanced Medical Solutions (LSE: AMS) is a worthy purchase right now. Its business model is very sound and consistent, with its focus on wound care providing a reliable financial outlook. In fact, in the last five years Advanced Medical Solutions has increased its earnings in every year, recording an annualised growth rate of 13% during the period.
Looking ahead, it’s expected to continue this growth with 7% forecast in each of the next two years. As with Shire, its yield of 0.4% lacks appeal for income-seeking investors, but with dividends being covered 8.2 times by profit, there’s scope for a rapid rise in shareholder payouts. As such, a 13% rise in dividends is due next year.
However, for investors who are only able to buy one of the three stocks discussed here, GlaxoSmithKline’s mix of growth and income marks it out as the most appealing buy for the long term.
