CSL, the plasma company, is by far the biggest healthcare company – being more than 50% of this sector’s top 200 market capitalisation. Other companies include Resmed (RMD) which has products for sleep disorder; Sonic (SHL) runs pathology services in Australia and overseas; Ramsay (RHC) owns hospitals etc; Cochlear (COH) is a world famous ear implant producer; Ansell (ANN) produces health protection products; and Primary (PRY), which owns medical practices and provides services for use by health professionals.
The health sector may benefit from an ageing population. It is certainly considered by most to be a defensive sector, as evidenced by the performance of many of these stocks through the GFC. However, the dividends are low by ASX 200 standards and often are not fully franked – or even franked at all – because of overseas exposure. They also typically trade on high P/E ratios compared to those of the broader index.
Although the health sector is defensive, it has performed exceptionally well over the last 12 to 18 months. However, the capital gains for this sector since my last review on February 6 have been more modest at 9.2% but that is still well ahead of the ASX 200 that gained 3.9% over the same period.
The pick of the bunch
In my previous review [1], CSL, Resmed and Primary passed my test for inclusion as a high conviction stock. That is, they were in the top 100 and met my ‘2.5’ broker recommendation status (please see my paper How to read our sector reports here [2] for details).
Even though these three stocks had run hard up to my last review, it can be seen from Table 1 that they took the first three places in gains since that date. I also put in a vote for Cochlear (COH), which lost ground after it reported in this season.
One perceived problem for Cochlear was that it has not yet got approval for its N6 product. It seems that approval is but a tick away and then it can recover from its recall of the N5 product. The new competition from China also seems overstated. People who can afford it will always have a superior implant placed in them. Of course, China can fulfil demand from people with lesser resources.
[3]The leader
Resmed is still the front-runner in terms of consensus recommendation. Primary and CSL have now slipped out of the ‘buy window’ possibly due to price, rather than the strength of the companies. Although three of the four small cap stocks (Sirtex, Acrux and Mesoblast) have good recommendations, their size and recent performance fail to attract my attention.
The sector statistics, presented in Table 2, show that health is fairly priced, with an exuberance level of 0.2%. Its forecast capital gains are reasonable at 12.9%. Expected dividend yield is only 2.4% and, as I noted above, franking credits can be scarce in this sector.
There does seem to be a sector rotation underway – from defensives to cyclicals, and so it might be a little while before the expected gains over the next 12 months come to fruition. I am happy holding on to COH for the reasons given, but I am not yet tempted to buy any of the other socks in this sector.
[4]Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Charlie Aitken: NAB and Suncorp – dog starts wagging the tail [5]
- Paul Rickard: ASIC’s “crackdown” on hybrids – more noise? [6]
- Barrie Dunstan: Stick to the strategy [7]
- Penny Pryor: Buy, Sell, Hold – what the brokers say [8]
- Tony Negline: When are my financial advice fees tax deductible? [9]
- Questions of the Week: Pension payments and Liberal policy [10]