Healthcare shares are favourites for many investors as a result of the fact that their essential services are perceived to be more defensive, and lucrative compared to other stocks.
There is much justification to this view, and healthcare businesses also enjoy attractive revenues thanks to insurance schemes and government subsidies, which streamline the process for users and – at least in Australia – make adequate healthcare available to just about everybody.
However, how have Australia's biggest healthcare stocks really performed over the past 10 years, a time that encompassed the GFC, privatisation of Medibank Private Limited (ASX: MPL) and many other reforms to the economy?
As readers can see, they have by and large been a very decent investment (the chart excludes dividend payments). All except Primary Health Care Limited (ASX: PRY) outperformed the index, although Sonic Healthcare Limited (ASX: SHL) was a notable laggard.
Broadly speaking I think readers could be content with an average of 4% capital appreciation per annum which, with dividends, is likely to give you returns of between 7% and 9% per year on average. By comparison, The S&P/ASX 200 (INDEXASX: ^AXJO)(ASX: XJO) has risen just 9% in the past decade.
However, investing in health and technology shares like CSL Limited (ASX: CSL), ResMed Inc. (CHESS) (ASX: RMD), and Cochlear Limited (ASX: COH) would have seen you smash the index, as a result of their ability to leverage their research ability to develop new products that can be sold globally.
Companies like Primary Health also have an effective business model but are geographically limited which can make them more vulnerable to regulation and the fortunes of a particular population. Ramsay Health Care Limited (ASX: RHC) has managed to effectively turn overseas expansion into market-crushing returns.
Over the next decade CSL, Cochlear, and ResMed are likely to continue winning for shareholders as their research & development budget should result in a number of new products over the long term to maintain or increase sales. Investors should expect ongoing regulatory changes, but on the whole, healthcare shares will remain attractive and investors could do worse than to increase their exposure to this sector.
