There’s no denying the global population is getting older. Virtually every country in the world is experiencing growth in the number and proportion of elderly people within their populations.
Here in the UK, it’s no different. According to the Office for National Statistics (ONS), in 1976, 14.2% of the population was aged 65 or over. In 2016, this number had increased to 18%. By 2046, the figure is expected to leap to a huge 24.7%.
What’s the best way to capitalise on the world’s ageing population? Healthcare, of course. It’s not rocket science to realise that as people age, their healthcare needs increase. In the US, healthcare spending on the elderly is around three times that spent on the general working-age population. With that in mind, here’s a look at two healthcare stocks that should benefit over the long term.
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AstraZeneca
AstraZeneca (LSE: AZN) is a global, science-led biopharmaceutical company that focuses on the discovery, development and commercialisation of prescription medicines. The three main areas it specialises in are oncology (the study of cancer), cardiovascular, renal and metabolic diseases (CVMD) and respiratory. The healthcare giant operates in over 100 countries, with millions of patients using its products.
The stock is popular among both private investors and city fund managers alike. Indeed, it’s currently the second largest holding in Neil Woodford’s Equity Income fund, at 6.8% of the portfolio. But is AstraZeneca the best way to play the world’s ageing population right now? I’m not convinced.
While the long-term story looks attractive, the current fundamentals don’t strike me as compelling. For example, revenue has been trending downwards for several years now and dividend coverage has been very thin. Earnings are forecast to fall 4% this year. Yet, the valuation of the stock is still quite high. With earnings per share of $3.65 estimated for FY2018, the forward P/E is 19.7. That seems a little high to me given the company’s lack of momentum. As a result, I’ll be keeping AZN on my watch list for now.
Smith & Nephew
One healthcare name that I do believe warrants a punchy valuation is joint replacement specialist Smith & Nephew (LSE: SN). To my mind, the stock is an excellent way to capitalise on the world’s ageing population.
As we get older, our bodies break down. My grandfather, who loved a game of golf, is a great example. He needed hip, knee and shoulder replacements in his 70s. It’s a common problem. In England and Wales alone, there are approximately 160,000 hip and knee replacement procedures performed each year.
Smith & Nephew looks to be a great way to get exposure to this niche area. The company is a joint replacement specialist with operations all over the world, including strong emerging markets exposure.
Revenue has been ticking up slowly but steadily in recent years, and looks set for further growth growing forward, with analysts pencilling in a 5.2% rise in the top line this year. Earnings per share are expected to jump about 8%.
The stock has pulled back in recent months, from a high of around 1,430p in October to just under 1,300p today. As such, I think now could be a good buying opportunity. The forward P/E is high at 19.6, but given that sales and profits are trending upwards, I believe the valuation is justified.
