Which healthcare companies should you own?

Steady customer demand and the ability to charge a premium for a service can make for a sound investment.

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We all have to go to the doctor sometimes. Everyone realises medical and healthcare services are specialised and can be expensive. Healthcare companies’ steady customer demand and ability to charge a premium for services can make for a sound investment.

Major healthcare providers can have high profit margins, return on equity and return on total capital. Investors love seeing those three in a stock. Add growing earnings to that and you may have a very attractive stock.

Here are four stocks that have the high performance investors look for in strong, competitive businesses.

ResMed Inc. (ASX: RMD) has all three of the performance ratios at or near 20%. Its five-year total shareholder return was about an average annual 13%. This maker of medical products for respiratory and sleep related respiratory disorders sells in approximately 100 countries by direct offices and distributor networks.

Revenues and net profits have grown steadily. In FY2012 it started paying a dividend and its current payout ratio is about 35%. It still has a fair portion of earnings going back into the company for further growth.

Sirtex Medical Limited (ASX: SRX) develops and sells medical devices and biotechnology to deliver liver cancer treatments. Using small particle technology, more specific targeting of cancer cells is possible with less side effects on healthy tissue.

The company carries no debt and our three performance ratios are about 19%-20%. It achieved the highest total shareholder return of these four, around an average 49% annually over the past five years. FY2013 net profit was $18.2 million.

Fisher & Paykel Health Care Corporation Limited (ASX: FPH) manufactures and sells devices and systems for respiratory care and treating sleep apnea. Its net profit margin and return on total capital are about 15%, yet return on equity is just over 20%. Its five-year total shareholder return was an average annual 14%.

It showed remarkable growth over the first half of FY2014, with a 34% rise in net profit. Its FY2014 full year profit guidance is for about NZ$97 million.

CSL Limited (ASX: CSL) had the highest of the three performance ratios of the four companies. Net profit margin and return on total capital are about 24%-25% and return on equity is 40%. It achieved a five-year total shareholder return of an average 19% per annum.

This biopharmaceutical company creates and distributes products for treating blood related diseases and disorders as well as viral and bacterial diseases. It is the largest healthcare company listed on the ASX with $34.1 billion in market capitalisation.

It had a good increase in net profit in FY2013, up about 18% to US$1.21 billion. It is conducting a share buyback program, where it plans to purchase up to an aggregate buyback consideration of around $670.4 million.

Foolish takeaway

Health care companies’ defensive nature helps protect against market downturns. The companies are not price-competitive businesses that survive by discounting a commodity service or product.

They can become good long-term investments that allow the power of compounding to grow your returns over time.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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