These 5 healthcare stocks will secure you a healthy financial future

Demographic changes, an ageing population and the end of the mining boom mean that all long-term stock market investors should own at least one healthcare company.

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The healthcare sector is often considered to be ‘defensive’ because healthcare is close to being non-discretionary. Whereas retailers must convince their customers to part with their hard-earned cash, healthcare providers either relieve pain or prolong life. If you can afford the healthcare you need, you get it, regardless of economic crisis or alternative ways of spending your money.

In Australia, we are extremely lucky to have both public and (subsidised) private healthcare systems. That means that everyone can receive at least some degree of care when they are ill or injured. Asides from making our populace healthier and happier, our healthcare system ensures that healthcare providers can generally rely on being paid. In Australia, you’ll generally receive timely treatment, regardless of your socioeconomic status. Therefore, demand for healthcare services depends less on affordability, and more on the needs of individuals. The ageing population also ensures that the average Australian will have greater healthcare needs in the future.

One company busily proving that healthcare isn’t just defensive is Sonic Healthcare Limited (ASX: SHL), which has seen its share price increase from $7.50 to $16.80 in the last 10 years, as well as paying a reasonable dividend along the way. The company provides medical diagnostic services including pathology and radiology services. It derives 49% of its revenue from overseas and is bound to profit handsomely from the falling Australian dollar. Motley Fool contributor Mark Woodruff was bang on the money when he called Sonic a buy at under $16. At current prices, the $6.8 billion company trades on a trailing P/E ratio of 18.5 and a dividend yield of 3.8%, 45% of which is franked.

Sonic’s most important competitor in Australia is Primary Health Care Limited (ASX: PRY). It also provides diagnostic services and owns and runs general medical practices, and thus has exposure to the number of GP visits. Primary currently trades on a trailing P/E ratio of about 15.8 and yields about 3.7% fully franked, making the investment far more attractive than a bank account for long-term investors. Currently, the Coalition government is considering introducing a $6 charge for visiting the doctor. This may reduce the frequency of visits by older people, who may choose not to visit the doctor as a preventative measure. This may slow the growth of revenue from general practice and diagnostic services, but is unlikely to reduce it.

Less preventative healthcare is sure to be a boon for hospital operator Ramsay Health Care Limited (ASX: RHC), which has recently expanded its French operations. The company doesn’t appear cheap with a trailing P/E ratio of almost 30 and dividend yield of about 1.7%. However, given strong management, demographic tailwinds and plenty of room to grow, investors are right to expect plenty of growth in the long term.

Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) is an excellent alternative to ResMed Inc (ASX: RMD) for those who want exposure to the lucrative sleep apnoea market, along with exposure to the health industry more generally. Fisher and Paykel Health is one of New Zealand’s finest operations, with a global customer base and a market capitalisation of $2.038 billion. The company trades on a trailing P/E of 23.8 and pays a dividend of 3%, unfranked. Shareholders should keep an eye on levels of debt and the sustainability of the dividend payment, but I like the company’s core competency of delivering medical equipment, and its broad geographical customer base, which insulates it from regional issues.

Those looking for a small-cap stock, should consider buying shares in 1300 Smiles Limited (ASX: ONT). The company owns and provides support to around 25 dental practices, the majority of which are located in Queensland. The investment thesis relies on beating its competitors; their edge in that regard is the increasingly apparent long-term focus of management. The company has a price tag to match its prospects, with a trailing P/E ratio of 22.5, although the dividend yield is respectable at 2.9%, fully franked. 1300 Smiles has cash for acquisitions, but is waiting until the right opportunities present themselves. There’s a chance that FY 2014 will underwhelm the market and a disappointment may provide an excellent opportunity to buy shares, though I find the current price of $6.60 reasonably attractive.

Foolish takeaway

Don’t suffer under the illusion that healthcare is a defensive sector. It’s simply a really attractive one. Unlike mining, it doesn’t rely on commodity prices, it’s rarely contract-based (like mining services or IT consulting) and healthcare is one of the last things people scrimp on when times are tight. Mercifully, Australians demand a decent healthcare system, so governments are hesitant to introduce policies that might hurt the companies that provide healthcare services. On top of that, investing in healthcare is an excellent way to play the ageing population.

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Motley Fool contributor Claude Walker (@claudedwalker) owns shares in 1300 Smiles.

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