CSL Limited (ASX: CSL) has fallen by 4% since the start of the year. That’s behind the performance of healthcare sector peers Cochlear Limited (ASX: COH) and Ramsay Health Care Limited (ASX: RHC). They have risen by 41% and 13% respectively. However, in my view CSL has recovery potential over the long term.

Dividend appeal

CSL’s yield of 1.9% is lower than that of popular dividend shares such as Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA). Their yields are 6.4% and 6% respectively. However, I believe that CSL will become a sound income stock over the medium to long term thanks to its dividend growth rate.

For example, in the 2016 financial year its dividend was covered 1.8 times by earnings and 1.2 times by free cash flow. It is forecast to raise dividends per share by 25.3% per annum over the next two financial years. This puts it on a forward yield of 2.7% using the forecast for financial year 2018.

Financial standing

CSL’s finances provide scope for greater investment in its product pipeline. In the 2016 financial year CSL invested US$614 million in its R&D programme. Its free cash flow of US$683 million and net debt to equity ratio of 100% show that it can to afford to invest greater amounts in its pipeline in future years. This will positively catalyse its earnings in my view.

CSL’s financial standing will also allow further investment in its capacity and productivity. For example, it expanded its fleet of plasma collection centres by opening 22 locations in financial year 2016. This brings CSL’s total fleet to more than 140 in the US and Europe and makes it one of the largest and most efficient plasma collection operations in the world. This ensures a reliable supply of products to existing customers as well as the scope to easily expand its sales into new territories.

Growth prospects

Increased capacity is necessary due to a forecast rise in demand for products such as albumin in China and Privigen in the US. Alongside them, CSL’s investment in its influenza vaccine division Seqirus is forecast to boost earnings from financial year 2018 onwards. I believe that the opportunity for growth in Seqirus’ earnings is high due to its size, scale and efficiency advantage versus most sector peers.

Further, demand for influenza vaccines is likely to rise as world population growth of 35% is forecast between now and 2050. Each year up to 10% of the world’s population contracts influenza, which provides a growth tailwind for Seqirus over the long run.

Stability

CSL’s beta of 0.6 provides evidence of its low volatility shareholder experience. Allied to this is a geographically diverse business model and a stable of products (and product pipeline) which is broad and relatively low risk in my opinion. CSL’s low positive correlation with the wider economy also means that it could rise in value even if the ASX’s negative returns in 2016 continue.

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Motley Fool contributor Robert Stephens has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.