Half-year results today from FTSE 100 healthcare giant Smith & Nephew (LSE: SN) and small-cap Primary Health Properties (LSE: PHP) confirm my view of the positive long-term outlook for these businesses. They’re stocks I’d consider buying and holding forever.
Operational excellence
Smith & Nephew’s first-half revenue of $2,336m was bang-on the analysts’ consensus forecast. It was up 3% on the same period last year on an underlying basis, which excludes negative impacts of 1% from currency and 2% from the 2016 disposal of the group’s gynaecology business.
Trading profit of $493m was ahead of forecasts of $488m and underlying earnings per share (EPS) of 43 cents — 15% up on the same period last year — beat expectations of 37.4 cents.
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The increase in earnings was helped by a one-off tax benefit but also by a 30bps improvement in trading profit margin. The latter shows that the chief executive’s focus on driving operational excellence across the group is bearing fruit.
The company said: “We are taking good momentum into the second half and I am confident that we are on track to deliver our full-year revenue and trading margin guidance.” This is for underlying revenue growth of 3% or 4% and a 20-70bps improvement in trading profit margin.
Long-term tailwinds
Smith & Nephew’s shares are trading 1.8% higher at 1,325p early-afternoon. The forward price-to-earnings (P/E) ratio of 20 and prospective dividend yield of 1.9% may not scream “cheap“ but I believe the premium rating is more than compensated for by the long-term tailwinds for the business.
Growing numbers of active retirees in the ageing populations of western countries, together with rising wealth and healthcare spend in developing economies, are trends that are set to continue for decades. Smith & Nephew, with its specialities in such areas as hip and knee implants, fracture systems and wound care, is well placed to deliver increasing profits long into the future. As such, I rate this stock as one to buy and hold forever.
Bond-like qualities
Primary Health Properties, which is also trading modestly higher after its results today, is another stock I’d put in the same bracket as Smith & Nephew. While its market cap of £690m is a fraction of the Footsie group’s multi-billion-pound valuation, I nevertheless view this small-cap company as a blue-chip business.
Primary Health today reported a 5.5% uplift in net asset value (NAV) per share and an 8.3% increase in EPS. The shares are trading at a 20% premium to NAV and on a forward P/E of 22. However, it’s usual for companies in the healthcare property sub-sector to trade at a premium to NAV and on a premium P/E. For me, the value in Primary Health is to be found in a prospective 4.6% dividend yield, a history of 21 consecutive years of dividend increases and the prospect of the payout rising for many years to come.
Being invested exclusively through long leases and predominantly upward only rental contracts, with 91% of its rent roll funded directly or indirectly by the NHS in the UK or HSE in Ireland, the company enjoys secure, long-term cash flows and a high occupancy rate (currently 99.7%). This gives Primary Health bond-like qualities and makes it another stock in my buy-and-hold-forever category.
