In the ongoing bloodbath in equity markets, everyone is looking for safety. That means you need to go back to basics and look for sectors which are immune to interest-rate cycles, trade wars and recessions.
Health-care stocks are considered defensive because health insurers, pharmaceutical companies, and medical-device makers generally perform better in times of economic uncertainty.
Just like retailers, utilities, and garbage collectors, health providers offer services that we can’t afford to put off in a recession and economic swings don’t typically curb the roll-out of new drugs and devices.
That’s the reason the S&P Health Care Index is up 9.38% this year, outperforming the benchmark S&P 500 which has fallen over 2%.
Hedge funds have built up their biggest position in health-care shares in the past five years, according to Goldman Sachs research cited by The Wall Street Journal in September. About 17% of hedge funds assets were in the healthcare sector, second only to shares of tech companies.
Sustainable Returns
Stocks like Merck & Company Inc (NYSE:MRK) and Medtronic Plc (NYSE:MDT) are well positioned to not only beat the market in this downturn, but also provide good sustainable returns.
Merck, a global healthcare provider, has so far delivered more than 36% in total returns in a year in which social media giant Facebook has fallen 24%.
In October, the drugmaker said it plans to invest $16 billion in new capital projects through 2022, a 33% jump over what it said was its planned spending in February. It also boosted its dividend by 15% to $2.2 a share annually.
The company is benefiting from its top-selling cancer drug Keytruda, which brought in $1.89 billion in the third quarter -- up 80% from a year ago. With strong earnings momentum, a growing dividend and buybacks, we believe Merck is a good long-term bet for buy-and-hold investors even with its shares trading near its 52-week high.
Medtronic is a less well known healthcare stock that we like due to the company’s strong market position and its hefty payouts. The world’s biggest medical device maker controls 50% of the global pacemaker market. It’s also a leader in products that assist with spinal surgeries and diabetes care.
Medtronic in September paid $1.6 billion to buy Mazor Robotics Ltd. to expand its leadership in the market for spinal surgery through guided robotic procedures.
No matter in which direction the economy goes, stocks like Medtronic will continue to churn out cash. The company has a long-term strategy to pay out 50% of its free cash flow to shareholders as dividends. With an almost 15% surge in its shares this year and a $2 a share annual dividend, Medtronic is another solid healthcare stock to stash in your long-term portfolio.
Bottom Line
Healthcare stocks, such as Merck and Medtronic, are defensive stocks that could outperform the broader market if we’re in for a deep correction and a possible recession in 2019. Diversifying your portfolio with defensive stocks that pay regularly growing dividends is always a good strategy. Healthcare providers are certain to top that list.