There’s a Megatrend Powering These Healthcare Stocks

We’ll get to healthcare stocks in just a moment, but first I’d like to touch on the state of the market. It’s been an up-and-down market over the last few years, but mostly up. The S&P 500 has returned 15% since the end of 2021 in the post-pandemic environment.

The downtimes have all been about rising interest rates. And the market moves higher when fear of higher rates goes away. There was a bear market for all the indexes in 2022 as inflation rose to a forty-year high and interest rates spiked higher. The market rallied in 2023 as inflation came down fast and interest rates looked to have been peaking.

In fact, the S&P 500 is up 41% since the end of 2022. It hasn’t gone straight up though. There were a few blips. Stocks sold off last fall when the benchmark ten-year Treasury rate soared to a brand-new high for this cycle. Fed assurances of rate cuts this year countered the pessimism and stocks rallied again.

After a five-month rally in the S&P, the index declined 5% in early April on renewed interest rate fears. Sticky inflation, with the CPI index rising in all the first three months of this year, caused investor angst over the again rising ten-year Treasury rate and the possibility that the Fed wouldn’t cut the Fed Funds rate this year, or would even raise it again.

But the Fed came to the rescue of that selloff too when the Chairman stated that the next rate move was more likely to be lower than higher. That combined with slower economic news and the April CPI report that came in in line with expectations assuaged investor fears. Stocks are off to the races again.

Is this saga over? Will the Fed deliver the currently expected September rate cut? Are there more ugly twists and turns ahead for this ongoing interest rate story? Who knows.

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The market will be at the mercy of something you have no control over. But there’s a better way. There are more fundamental and important, longer-term shifts taking place beneath the service. One seismic shift is the changing population. The population of the U.S. and the world is now older than ever before and getting still older at warp speed. You don’t know what inflation or interest rates will do. But you can bank on the aging population.

The aging population is a megatrend that provides a massive tailwind for stocks of companies that are poised to benefit. It’s like owning stocks that benefit if the sun sets at night. Healthcare is the most obvious beneficiary. Older people spend more money on healthcare.

In 2012, total healthcare expenditures in the United States were $2.8 trillion. Since then, spending in the sector has skyrocketed. Centers for Medicare and Medicaid estimates that total U.S. national healthcare expenditures were $4.3 trillion in 2021. That number is projected to grow to $6.2 trillion by 2028 and $12 trillion by 2040. Deloitte estimates healthcare spending to grow from 16.8% of total GDP in 2019 to 26% by 2024.

There’s a better way than this interest rate conveyor belt. The best healthcare stocks are positioned in front of a boom. And these companies will benefit regardless of what happens with inflation or the Fed or who is elected President.

Here are two great stocks to consider.

2 Great Healthcare Stocks to Take Advantage of the Megatrend

McKesson Corporation (MCK)

The pandemic aftermath made us acutely aware of the importance of supply chains, as disruptions caused short supplies and skyrocketing prices. Efficient distribution is what makes this whole consumer economy work.

McKesson Corporation (MCK) is a leading domestic wholesaler of branded, generic, and specialty pharmaceutical products. The company operates a supply chain that delivers products from 1,300 drug manufacturers to over 180,000 points of dispensation throughout the country. It supplies about one-third of the U.S. drug distribution market.

McKesson buys drugs from manufacturers, delivers them, and resells them to retailers at a profit. Established in 1833, the company has been honing the process for nearly two centuries. Naturally, it has strategic partnerships with companies like CVS (CVS), Walmart (WMT), and Rite Aid (RAD).

High performance has certainly been the case with this stock. Here’s how McKesson’s business has translated into stock total returns over the past several years compared to the overall market.

There are reasons to believe the stock can continue to deliver market-beating performance going forward. The company plans to buy back $3.9 billion worth of those shares in fiscal 2024. McKesson is also focusing on high-growth areas in oncology and biopharmaceutical services. Management knows the business and where the best opportunities are to deliver pharmaceuticals and services. The company also has plenty of free cash flow it can use to expand and make acquisitions.

But generating growth is easy when pharmaceutical demand continues to rise every year at a solid pace because of the aging population. It has a huge share of a business that grows all by itself every year in any economy.

UnitedHealth Group Incorporated (UNH)

UnitedHealth Group is a Dow Jones component that is America’s largest insurer and one of the world’s largest private health insurers. It’s a goliath with $360 billion in annual revenues that serves 149 million members in all 50 states and 33 countries. That’s a lot of monthly insurance premiums!

The group provides services at just about every facet of the healthcare process and the full-scale operation provides a powerful alignment of incentives that helps clients control costs better than competitors, which is a massive issue in the industry.

It’s also a huge company and operation. Scale is hugely important in this industry. It enables UnitedHealth Group to keep costs down by virtue of volume, have cash for acquisitions, and wield significant power to adjust rates as prices increase. That’s a huge benefit during inflation.

Although UNH has a long track record of market outperformance, it has lagged lately. It underperformed the market with a total return of just 6% over the last two years and 12% over the last year. Prior to these recent stumbles, the stock has blown away S&P 500 in returns in every measurable period over the prior ten years. Even after the past two subpar years, UNH has a total return of 650% over the last ten years, which is nearly triple the return of the overall market.

The stock got knocked around with a lot of the defensive dividend stocks as interest rates rose. More recently UNH took a hit because the company got hacked, causing massive disruptions in the industry. Then it got hit again when the government announced much lower Medicare reimbursements than had been expected and were well below what cost increases justified.

But the company seems to have put the recent problems behind after reporting solid earnings for the most recent quarter. UnitedHealth soundly beat expectations with an 8.6% revenue rise and a better than 10% increase in adjusted earnings from last year’s quarter. The company also issued strong guidance. It was a relief to the market after recent troubles and the stock has gotten good upward momentum with a 19% move higher in the month since the report.

UNH currently pays a quarterly dividend of $1.88 per share or $7.52 annualized, which translates to a 1.4% yield at the current price. The payout is well supported with just a 30% payout ratio and the dividend is likely to grow. In fact, the quarterly payout has grown 150% over the past five years, from $0.75 in 2018 to the current $1.88.

UnitedHealth Group is a large, safe business that provides stability in uncertain markets. UNH has a long track record of outperforming the market index with far less volatility and beta of just 0.56.

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