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2 healthcare shares for a defensive portfolio

The healthcare sector is one of my favourite industries to invest in. I like it because it’s defensive due to people being willing pay what it takes to remain alive and healthy, they will rank their health above a new car or couch.

It’s also defensive because people need health services year-round. People don’t decide when they’re ill or injured.

I also like the healthcare industry because a lot of businesses are aligned to the growth of Australia’s ageing population. The sad reality is that the older we become the more likely we are to need some sort of healthcare assistance.

However, no business is a buy at any price. That’s why I’m wary of shares like CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH). They are wonderful businesses but come with high valuations, which means it’s less likely we’ll make market-beating returns in the short-to-medium term buying those two at today’s prices.

With all of the above in mind, here are two healthcare ideas:

Japara Healthcare Ltd (ASX: JHC)

Japara is one of Australia’s largest aged care providers with a presence in several states.

As I mentioned above, Australia’s population is steadily getting older and this is leading to more people needing to be in aged care facilities.

Most people don’t end up needing to go into an aged care facility until they’re at least 75 or 80. This means there is a long-term projected growth of residents entering Japara’s facilities.

In the shorter-term, Japara expects to add over 1,000 net new beds in the next few years. This should increase earnings materially by FY21 with more residents and less construction costs.

It’s currently trading at 24x FY18’s estimated earnings.

Ramsay Health Care Limited (ASX: RHC)

The private hospital business’ share price has fallen by over 25% during the past year. A lot of the fall is justified. Private health insurance affordability in Australia is not getting any better and its foreign operations are not going well right now either. Plus, rising interest rates are hurting defensive shares.

However, the fall has led to an improvement in the valuation. It’s trading at around 19x FY18’s estimated earnings, which is the best value it has been for a long time. Ageing demographics will assist earnings over the long-term and pressure on the public system could send more patients into the private system in the future.

If it makes clever acquisitions which boost earnings and if it can turn its new supply business into a sizeable operation then earnings could continue to grow despite the current headwinds.

One small bonus is that the grossed-up dividend has now reached 3.68%.

Foolish takeaway

At the current prices both Japara and Ramsay could provide market-beating returns over the next two decades thanks to ageing demographics. At the current prices I’d go for Japara, there is a decent chance that Ramsay could drop another 10% or more over the next 12 months – that would be an even better time to buy if you’re interested.

Another top healthcare business for your portfolio could be this exciting stock which is growing in the US and Europe.

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Motley Fool contributor Tristan Harrison owns shares of JAPARA DEF SET and Ramsay Health Care Limited. The Motley Fool Australia has recommended Cochlear Ltd. and Ramsay Health Care Limited. 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 Scott Phillips.

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