3 Small-Cap Dividend-Paying Healthcare Stocks Compared With Pfizer

Published Sat, 31 May 2014 21:30 CET by DividendYields.org

Investing in dividend paying stocks is an ideal approach to turbo charge the stock portfolio and also to buffer oneself against the vagaries of stock movement. Choosing a stock from a mature sector is a good idea, as the valuations would not be too high and there would be future stable growth. One such sector is healthcare. The healthcare sector consumed an average of 9.3% of the GDP across the OECD countries as a whole. Within the US this is even higher at 17.7% and it is in double digits in most of the countries, including The Netherlands (11.9%), France (11%), Germany (11.3%) and so on. There is ample scope of future growth in this sector, because of an ageing population requiring higher expenditure on healthcare vis-à-vis other sectors. Below are some stocks that might be interesting choices for investors looking for attractive dividends.

Meridian Bioscience (Nasdaq: VIVO) produces a range of diagnostic test kits. The top line for this company has been growing at a steady pace and the net margins are in the double digits. One another good aspect of this company is that it has zero debt on its balance sheet. It yielded 3.9% recently and its dividend has been increasing at a steady pace of 4% for the past 5 years. The payout ratio is 65% and is thus in a comfort zone. It recently received FDA approval for a new test on Bordetella Pertussis, which is the causing agent of whopping cough. This test can lead to improved sales later this year. The company is operating in three segments: Life Science, U.S Diagnostics and European Diagnostics. Although the dividend growth for the past 5 years has been a lowly 3.20%, higher growth is predicted in the future as management has started taking concentrated steps to improve overall efficiency.

PetMed Express (Nasdaq: PETS) is an online pet pharmacy, offering prescription and non-prescription medications, as well as other health products, for pets. It gives a dividend yield of 5.08% and has a comfortable P/E ratio of 14.87. Net sales were up 2.5% and net margin was up 4.7% from the year earlier. There has been a decrease in operating expenses by 83 basis points and the company is trying to bring greater efficiency across their distribution channel. The payout ratio is 76%, which is a bit on the higher side and might cause the company to reduce the dividend in the future, unless it is able to get excellent growth. Another major point to note is that the company is facing increasing competitive pressure which will only increase in the future after the acquisition of Novartis’ animal health division by pharmaceutical major Eli Lilly. While bears worry about the competitive pressure and lower growth, the bears like the new steps taken by the management and the current valuation of the company. As the company is dealing with mostly sales of pet products directly to customers, the overall operating margin is bound to be on the lower side compared to other healthcare firms involved in research and diagnostics. For the past 5 years the dividend growth has been a healthy 11.2% on the back of improved profitability. This, added to the fact that the P/E ratio is on the lower side, gives the investor the double benefit of future growth in the value of the stock and higher dividends.

Psychemedics (Nasdaq: PMD) is the world's leading drug testing company using hair for the detection of drugs of abuse. Its dividend yield is 4.20% and its payout ratio is 82%. The P/E ratio for the stock is 19.5, which shows that it is not overvalued. As the overall business model is unique, there is less competition and the company has shown stable growth for the past several years. The dividend has also increased for the past 5 years and the outlook for the company is stable. It provides testing and confirmation of drug abuse using mass spectrometry. Drugs covered are marijuana, methamphetamine, phencyclidine (PCP), cocaine and other opiates. The dividend growth has been on the lower side for the past 5 years and hovering around less than 5% per annum. The operating margin has been stable at 21.24% and given the future scope of the business, there does not seem to be heavy improvement in this area. However, the stock offers a good diversification option as it is involved in a niche area within healthcare industry where the demand would continue to show growth for the next couple of years.

Meridian Bioscience PetMed Express Psychemedics Pfizer
Market Cap $884 mil $269 mil $75.1 mil $189 bil
Payout Ratio 65% 76% 82% 64%
Price/Earnings 23.6 14.9 20.0 18.0
Earnings Per Share 0.88 0.90 0.72 1.64
Dividend Growth Per Annum (5 Yrs) 3.30% 11.2% 4.56% 10.2%
Operating Margin (2013) 30.38% 11.85% 21.24% 31.32%

One can also go for a blue chip healthcare stock like Pfizer (NYSE: PFE). It has a yield of 3.53% and a payout ratio of 64%. Its P/E ratio is 18 and the company is known for a stable and diverse business portfolio, which can give a decent yield in the future and can also protect against major swings in the market. Although the dividend yield is not as high as some small healthcare stocks, being a major healthcare blue chip company investors can be assured of decent capital appreciation over a long term if they invest the dividend back into the stock. Pfizer has a healthy operating margin of above 30% and has shown a dividend growth of 10.19% for the past 5 years. Being a well-diversified group, this is very interesting for investors interested in investing in the healthcare sector.

Small Cap Healthcare Stocks Compared With Pfizer Performance Graph

According to the graph above, Pfizer and Psychemedics have performed better than the Dow Jones Industrial Average over the past 5 years, whereas the other two companies have not shown requisite capital appreciation in their stocks. However, purchasing the latter two currently can help in riding on any future upswing in the valuation of these companies. This, coupled with the high dividend return of the companies, can be a double incentive to purchase these stocks.