3 High Dividend Healthcare Stocks for Passive Income

The global economy has slowed down remarkably recently, mainly due to the aggressive rate hikes implemented by central banks in an attempt to bring inflation back to normal levels. This has significantly increased the risk of an impending recession.

Most healthcare stocks are resilient to recessions as consumers fail to scale back healthcare spending even in adverse economic conditions.

Here, we’ll discuss the prospects of three healthcare stocks that offer above-average dividend yields and decent growth prospects.

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Attractive valuation and a key benefit

Headquartered in the United Kingdom, GSK plc (GSK), formerly GlaxoSmithKline, develops, manufactures and markets healthcare products in the pharmaceuticals, vaccines and consumer products sectors. Its pharmaceutical offerings relate to the following disease categories: central nervous system, cardiovascular, respiratory and immune inflation.

GSK has a key competitive advantage, and that is its focus on research and development. The company invests heavily in research and development. In 2022, it spent nearly 13% of its revenue on R&D.

On the other hand, GSK has had a volatile current account, mainly due to some patent expirations and sharp fluctuations in exchange rates. For example, Advair’s patent expiration in 2019 took a toll on the company’s results over the following two years. Overall, GlaxoSmithKline has grown its earnings per share by an average of just 0.9% per year over the past nine years.

On the other hand, GSK’s other ventilation products are showing strong growth rates. The company also has several vaccines that are seeing strong sales growth. As a result, GSK is expected to increase its growth rate in the coming years.

Of note, the stock currently trades at a nearly 10-year low price-to-earnings ratio of 8.3, which is much lower than the stock’s historical average of 13.0. The cheap valuation reflects a somewhat lackluster near-term growth outlook and the impact of inflation on the stock’s valuation as high inflation reduces the present value of future earnings.

However, the Fed has prioritized restoring inflation to its long-term target of 2%. Inflation has fallen every month since its peak last summer, thanks to aggressive rate hikes. It is therefore reasonable to expect that the Fed will reach its target sooner or later. If inflation returns to normal levels, GSK stock should receive a strong valuation tailwind.

It’s also worth noting that the stock offers a dividend yield of over 4%. The company has a healthy payout ratio of 42% and a strong balance sheet with a solid interest coverage ratio of 9.3. Given GSK’s resilience to recessions, its dividend should be considered safe for the foreseeable future. The only caveat for US investors is the sensitivity of the dividend to the GBP/USD exchange rate.

Short story, big prospects

Organon & Co. (OGN) was spun off from Merck (MRK) in June 2021. Organon is a pharmaceutical company that develops and commercializes healthcare solutions in a variety of areas. The portfolio of well-established brands consists of almost 50 products that have lost patent exclusivity and are used for treatment in the areas of cardiovascular, respiratory, dermatology and pain management without opioids. Organon’s women’s health portfolio includes fertility and contraceptive brands such as Nexplanon/Implanon and NuvaRing.

The company also has a small portfolio of biosimilars used in immunology and oncology. The spin-off transferred 15% of Merck’s sales, 25% of its manufacturing facilities and 50% of its products to Organon.

Organon has some significant growth drivers. The established brands previously owned by Merck should give Organon strong free cash flow, since its off-patent products don’t require high research and development costs.

In addition, the women’s health business has been a pioneer in its field since its inception in 1923. The company produced the first-ever hormonal oral contraceptive and the first combined oral contraceptive with a lower dose of estrogen. Recently, Organon developed the first once-a-month contraceptive ring.

Biosimilar drugs make up only a small portion of Organon’s revenue, but the company is trying to expand this segment. Organon will launch a biosimilar to Humira, a blockbuster drug, in the US this year. Given Humira’s exuberant sales over the past decade, Organon’s biosimilar drug could prove to be a key growth driver for the company in the years to come.

Additionally, Organon currently offers a 4.6% dividend yield with a solid 26% payout ratio. Since the company has a strong balance sheet with an interest coverage ratio of 4.1, the dividend is safe for the foreseeable future.

It’s also important to note that the stock trades at a price-to-earnings ratio of just 5.5. The favorable valuation results primarily from the short history of the split-off company. If Organon proves it can stabilize or grow its earnings, its stock will almost certainly fetch a much higher valuation multiple.

27 years of dividend increases

Sanofi (SNY) , a leading global pharmaceutical company, was founded in 1994 and is based in France. The company, with a market capitalization of $119 billion, develops and commercializes a variety of therapeutic treatments and vaccines. Pharmaceuticals make up 72% of sales, vaccines make up 15% of sales, and consumer healthcare contributes the rest of sales. It generates a third of its sales in the US, just over a quarter of its sales in Western Europe and the rest of its sales in emerging markets.

Sanofi’s specialty care business, particularly in the areas of rare diseases and immunology, is showing strong growth rates. Some of these products, like Dupixent, are just beginning to gain traction. These products are therefore likely to remain important growth drivers for many years to come.

Sanofi has also fueled growth through significant acquisitions. Because the company’s products are used to treat diseases, demand continues even during tough economic times. This is an important factor to consider, especially given the increasing risk of an impending recession.

Sanofi has a somewhat volatile but decent track record. Over the past nine years, the company has grown its earnings per share by an average of 7.4% per year. Given the promising growth prospects for some of its products, Sanofi is expected to grow its earnings per share in the mid-single digits in the coming years.

Sanofi has increased its dividend in its local currency for 27 straight years. U.S. investors are likely to experience dividend volatility due to currency fluctuations, but Sanofi’s dividend is certainly attractive. Sanofi currently offers a 4% dividend yield, which is in line with the stock’s historical average yield. Thanks to its healthy 44% payout ratio and rock-solid balance sheet that’s nearly debt-free, the company will likely continue to increase its dividend for many years to come.

It’s also worth noting that Sanofi is trading at a nearly 10-year low price-to-earnings ratio of 10.7. This is much lower than our assumed fair earnings multiple of 16.0, which is consistent with the stock’s historical valuation and that of its peers. If the stock returns to normal valuation levels, it will greatly reward investors.

Final Thoughts

Recessions are inevitable every few years, so income investors should always try to identify stocks that are resilient to recessions. This is particularly true in the current investment environment, where the risk of a recession has increased significantly due to unprecedented central bank rate hikes.

The above three names are fairly recession-resistant, have decent growth prospects, and offer above-average dividend yields with a large margin of safety.