Med tech stocks have been a mixed bag of results the last two years, with most moving within established trading ranges. The impact of COVID and its effect on procedure volumes were slow to dissipate, and the growth outlook was uncertain, leaving the market for their stock without a solid catalyst to drive it despite many trading at value levels and paying healthy dividends.
Today, these healthcare stocks are forecast to produce steady growth for at least the next two years, supported by innovation, post-COVID normalization, global population growth, advancing economic development in emerging markets, and penetration of existing markets.
Top-line growth is expected to drive margin improvement, and most of these businesses pay dividends. The ones that don't provide value in other ways. The takeaway is that tailwinds are in place to support this sector, and they are expected to blow for years.
Johnson & Johnson, a Dividend King of MedTech stocks
Dividend King Johnson & Johnson (NYSE: JNJ) had a solid Q4 due largely to its MedTech unit. The company's revenue is down year-over-year (YOY) due to the Kenvue spinoff, but the core, ongoing business is up 6.5% YOY, led by a 13% increase in MedTech. MedTech sales are driven by wound closure devices, which gives evidence of strengthening procedure volume, and contact lenses, which are a growing and recurring revenue stream.
Earnings strength is expected to persist in 2024, and Johnson & Johnson will return to reported top-line growth in 2025. Until then, this King yields about 3.0%, trading at 15X earnings with a payout ratio below 50%. The pace of distribution growth may slow, but distribution growth should continue. Analysts made no change to the consensus following the release; they rate the stock at "hold" and assume a 5% upside at the midpoint and 35% at the high end of their range.
Abbott Laboratories on track to break out of its trading range
Shares of Abbott Laboratories (NYSE: ABT) have been trapped in a trading range confirmed on the day of its Q4 earnings release. However, the market bought this dip and has the stock on track to break out of its range soon. This company demonstrates solid core growth and has returned to reported growth following the post-COVID letdown. Growth should accelerate throughout the year and into the next.
The med tech unit supports Abbott’s strength, up 18% YOY on a 26% increase in the FreeStyle Libre glucose monitoring system. The diagnostic unit was also strong, producing double-digit core growth ex-COVID. This Dividend King pays a smaller 2% yield trading at a higher 25x valuation than JNJ but is equally safe and expected to grow. Abbott's value is tied to its business and management quality, which is among the highest of any healthcare-related business.
Intuitive Surgical: Leading the MedTech group to new highs
Intuitive Surgical (NASDAQ: ISRG) is the group leader, producing 16% top-line growth and a wider margin in Q4. This company is growing its business and earnings leverage with accelerated device installations and growing procedure volume at existing locations. This is driving a 22% increase in instruments and accessories, the recurring portion of the business, setting it up to pay solid dividends in the future. Until then, the company has been focused on growing business and building shareholder value, which increased by 20% on an equity basis during 2023. Top- and bottom-line growth will remain strong in the double-digit range in 2024.
Stryker Corporation trends higher on results and revenue quality
Stryker Corporation (NYSE: SYK) stands out among med techs, with its stock price trending steadily higher over the last decade. This stock trades at the highest valuation on this list, but there is a reason. Stryker is sustaining solid growth and pays dividends with the healthiest increase outlook.
Stryker stock yields only 1% trading at 30x but pays out only 30% of its earnings outlook while consistently outperforming expectations. The distribution growth rate is attractive and more than doubles its peers JNJ and ABT. Analysts also help support the market, rating the stock a "buy" and leading the price action with upward revisions. The consensus assumes the stock is fairly valued near $315, but the most recent revision is to $345, or about 10% upside.
