Why you should buy this blue-chip healthcare company with a 5% yield

Healthcare stocks are usually viewed by investors as ‘growth’ stocks that spend the majority of profits on developing new products to provide revenue growth in future years. The likes of Cochlear Limited (ASX: COH), ResMed. Inc  (ASX: RMD) and CSL Limited (ASX: CSL) are the types of healthcare companies that require huge research and development investment every year in order to stay ahead of competitors and keep revenue and profit growing.

The other healthcare stocks

There is another group of healthcare stocks that are not involved in the development of hardware or medical solutions, but rather profit from medical services and the infrastructure required to deliver the previously mentioned solutions. On the Australian share market there are a number of top-notch options in this space, such as private hospital group Ramsay Health Care Limited (ASX: RHC) and pathology group Primary Health Care Limited (ASX: PRY).

The best option?

In my opinion, one of the best options in the healthcare space for both earnings growth potential and relative valuation is Sonic Health Care Limited (ASX: SHL). Sonic has been around for around 20 years and provides medical diagnostics solutions in Australia, the US and Europe.

Sonic is the largest and most dominant pathology laboratory operator in Australia and also commands reasonable but much smaller market shares in the US and Europe. The company’s market share has been achieved primarily by acquiring businesses over the last decade and Sonic has noted that the next period will involve fewer acquisitions in order to concentrate on building margins and extracting efficiencies to cut costs and boost profit.

Huge yield

For a healthcare company, Sonic’s partially-franked 4.5% yield is a huge drawcard. When franking is taken into account, the yield rises to over 5% and appears to be sustainable based on a payout ratio of around 70%.

With nearly 50% of group earnings from outside Australia last year, strong earnings growth forecast, and an expectation that earnings growth will come from overseas in future years, Sonic appears to be a great choice for long-term investors. Especially those interested in getting exposure to the aging population in developed countries and overseas earnings.

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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