Healthcare duo: High quality, low beta

by Elliott Gue, editor Personal Finance

In the current environment, we recommend high-quality, low-volatility stocks whose underlying businesses can grow earnings even if global economic growth decelerates.

Two such large cap stocks that stand to benefit from below-market volatility and meaningful dividend growth potential are healthcare plays Johnson & Johnson (JNJ) and Pfizer (PFE).

Johnson & Johnson is a classic defensive name with a beta of 0.60 and a consistent record of boosting its quarterly dividends.

The consumer business accounts for roughly one-quarter of the firm’s annual revenue and includes Listerine, Sudafed, Tylenol, Neutrogena and other well-known brands.

In the third quarter, the segment’s sales climbed 4.9 percent year over year, led by a 10.1 percent uptick in international revenue.

Johnson & Johnson achieved this growth even after temporarily shuttering a major manufacturing facility in Pennsylvania to address quality issues.

The company should have these production issues resolved by the second half of the year and will enjoy a welcome tailwind when these products return to shelves.

The pharmaceutical and medical device segments drive the bulk of Johnson & Johnson’s earnings growth.

In 2011 the firm’s patent for Levaquin—a treatment for bacterial infections—expired, opening the door for generic competitors that undercut the drug’s profitability.

Fortunately, Johnson & Johnson has a solid pipeline of new drugs entering the market, including cancer treatment Zytiga and Incivo, which targets the hepatitis C virus.

But Johnson & Johnson’s medical devices business boasts the best near- term growth prospects. In mid-2012, the company will close its acquisition of Synthes, a Swiss outfit that specializes in devices used to set bones in trauma patients.

These products complement Johnson & Johnson’s existing DePuy line of artificial joints and will make the combined firm the largest player in the business.

Over the past five years, the firm has increased its dividends at an annualized rate of more than 9 percent. Buy Johnson & Johnson under 70.

Pfizer offers a pharmaceutical portfolio that includes a number of blockbusters, including cholesterol reducer Lipitor, Enbrel for rheumatoid arthritis and antidepressant Effexor.

When analyzing pharmaceutical giants such as Pfizer, investors must weigh the number of drugs scheduled to lose patent protection against the number of new treatments in late- stage clinical trials.

Pfizer is working through a significant wave of patent expirations: Lipitor lost its protection last year, while antipsychotic treatment Geodon and erectile dysfunction medication Viagra will have their patents expire in 2012.

It’s a tough pill to swallow, but the post-2012 outlook is more favorable; Pfizer has few major patents set to expire through the end of the decade.

Meanwhile, Pfizer boasts a pipeline of over 90 drugs in development, one-third of which will enter Phase III clinical trials by the end of 2012. Tofacitinib, a treatment for rheumatoid arthritis, is likely to be approved for sale in the US by the second half of 2012.

Eliquis -- a drug Pfizer owns as part of a 50/50 joint venture with Income Portfolio holding Bristol-Myers Squibb -- is a promising oral treatment that prevents strokes in patients suffering from an irregular heartbeat.

Pfizer’s stock sports a beta of about 0.80, and the company recently boosted its quarterly dividend by 10 percent to $0.22 per share, equivalent to a yield of about 4 percent. Buy Pfizer under 24.

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