2 healthcare shares to buy in early 2017

The healthcare sector has been one of the best performers over the past five years thanks to its defensive qualities, the demographic tailwinds and strong performance.

Just look at companies like Ramsay Health Care Limited (ASX: RHC), Cochlear Limited (ASX: COH) and Sonic Healthcare Limited (ASX: SHL) which are up 267%, 112% and 91% respectively.

However, share price declines have affected growth and defensive stocks fairly substantially with the expectation of rising interest rates. Below are two healthcare stocks that I think look attractive:

CSL Limited (ASX: CSL)

CSL is Australia’s largest healthcare company with a market capitalisation of $43.5 billion. Its share price has dropped 21% from 25 July to today’s price of $95.35.

CSL’s prospects for the future are the same at $95 as they were at $120. Australia as a whole will be willing to spend more for the population to remain alive and healthy. In FY16 CSL grew underlying earnings per share on a constant currency basis by 7.4%.

The key to CSL growing future profits is how effectively it can bring new products and treatments to the market. In FY16 it spent $614 million (10% of revenue) on research and development, which is encouraging. Management are expecting to grow net profit after tax on a constant currency basis by 11% in FY17.

CSL is trading at 24x FY17’s estimated earnings with a dividend yield of 1.77%.

Generation Healthcare REIT (ASX: GHC)

Generation Healthcare is a real estate investment trust (REIT) that purely invests in healthcare buildings and its market capitalisation is $375 million. In fact, Generation Healthcare is the only dedicated healthcare property entity on the ASX.

It owns a variety of property types among its 18 properties such as hospitals, medical centres, aged care, laboratories and other types of medical real estate.

At the end of FY16 it had an occupancy rate of 98.6% and its weighted average lease term was 12.2 years. Its balance sheet was in pretty good shape for a REIT as net debt was only 28.3% of total assets. In FY16 it grew its distribution by 3% which means it kept up with inflation.

According to research group MSCI, for the 11.5 years ended 30 June 2016, healthcare properties returned an average of 13.3% a year (more than office, retail, industrial and hotel) with the lowest return volatility.

Generation Healthcare is forecast by management to pay 8.973 cents per share in FY17 which equates to a forward yield of 5.24%.

Foolish takeaway

I think the healthcare sector will be one of the better performing sectors in the short and long term. Both of these companies should grow their earnings and dividends for a long time to come.

For Foolish investors looking for income, Generation Healthcare would be my choice. For investors looking for capital growth, CSL would be the better choice.

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Motley Fool contributor Tristan Harrison 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.

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