The health care sector continues to have huge appeal for long term investors. That’s because, while the outlook for the global economy is somewhat uncertain and growth could be pegged back by rising US interest rates and a slowing China, health care companies offer less highly correlated returns. In other words, they are less cyclical and less dependent upon the performance of the economy than most of their index peers.
Furthermore, the valuations on offer within the health care space appear to be relatively appealing. For example, AstraZeneca (LSE: AZN) currently trades on a price to earnings (P/E) ratio of just 15.7 despite being on the cusp of significantly improved financial performance.
Clearly, AstraZeneca has endured a challenging period in recent years, with a number of key, blockbuster drugs going off-patent and delivering huge falls in sales as a result of generic competition. However, AstraZeneca has freshened up its pipeline through a major acquisition programme which is still ongoing and, with the company having superb cash flow as well as a very sound balance sheet, it appears capable of taking on more debt in order to boost its long term profit potential.
In addition, AstraZeneca also offers very stable dividend payouts. In spite of its difficulties, dividends have been maintained in recent years and this means that the company continues to be a viable option for income investors.
Although its share buyback programme was cancelled when new management took over, this was a sensible step to take since that cash was better spent on improving the company’s treatment pipeline. And, with AstraZeneca forecast to return to earnings growth over the medium term, its yield of 4.2% has considerable appeal and could act as a positive catalyst on the company’s share price.
Also offering high total return potential is UAE-focused NMC (LSE: NMC). Its shares have risen by 67% since the turn of the year as investors began to factor in a stunning earnings growth rate which is set to see the company’s bottom line rise by 38% in the current year and by a further 23% next year. Despite this, NMC trades on a price to earnings growth (PEG) ratio of only 0.7 and this indicates that further share price rises are on the cards.
NMC could additionally become a very enticing income play. Certainly, its yield of 1.2% is rather low, but the company pays out just 20% of profit as a dividend. This means that dividend increases are likely to be brisk in future years – especially if the company can deliver on its highly impressive earnings guidance. And, with investor sentiment likely to remain buoyant if the global economic outlook deteriorates in the coming months, health care companies such as NMC could become increasingly popular among investors seeking high, less-cyclical growth rates.