Defensive industries such as healthcare are appealing to income investors due to their resilience during economic downturns. Companies in this sector are less prone to significant business disruptions, thereby reducing the likelihood of dividend cuts. Unlike many technological products or services, medical needs are non-optional, making healthcare a promising field for dividend stocks. Noteworthy examples within this industry include Merck and Medtronic.
1. Merck
Merck has experienced a 4% decline in its share value this year. A significant factor in this downturn is investor concern over potential competition for Keytruda, Merck’s principal cancer drug and largest growth driver. Summit Therapeutics, a clinical-stage biotech firm, is developing ivonescimab, which could compete with Keytruda in treating non-small cell lung cancer, one of its key markets.
Keytruda’s U.S. patent exclusivity is set to expire in 2028, which could lead to generic competition. Nevertheless, Keytruda’s revenue is expected to grow until this time, even if ivonescimab reaches the market earlier. The Food and Drug Administration (FDA) has approved Keytruda for many indications, most of which ivonescimab will not affect before 2028. Merck is also developing a subcutaneous version of Keytruda, which will not lose exclusivity in 2028 and is anticipated to perform well.
The challenges that Merck faces are common in the pharmaceutical industry. Merck, a leader in this field, has thrived for decades due to its ability to innovate and develop new medicines—its defense against competition. The company’s pipeline includes numerous programs, further expanded by acquisitions, such as the recently approved Winrevair for pulmonary arterial hypertension, following the acquisition of Acceleron Pharma.
Merck has established various collaboration agreements with smaller companies, including Moderna for a personalized cancer vaccine. While issues related to Keytruda may generate concern, they should not overshadow Merck’s longstanding strengths. The company has a robust dividend history, increasing payouts by 71% in the last decade, and currently offers a forward yield of 2.96%, exceeding the S&P 500 average of 1.32%. Merck remains a stable income stock.
2. Medtronic
Medtronic, specializing in medical devices, has a notable record of increasing dividends for 47 consecutive years, indicative of a solid business foundation. The company produces a wide range of products across various categories and operates in over 100 countries. While past performance does not guarantee future success, Medtronic has several promising long-term opportunities.
The diabetes care segment has been a major growth driver for Medtronic, notably with its MiniMed 780G insulin pump, featuring meal-detection technology that automatically adjusts insulin levels. With diabetes affecting approximately half a billion adults worldwide, products like those from Medtronic are in high demand. Additionally, Medtronic is developing the Hugo robotic-assisted surgery system, potentially advantageous in a market dominated by Intuitive Surgical.
Given the global aging population, the demand for minimally invasive surgeries—facilitated by robotic systems like Hugo—will likely increase due to benefits such as reduced scarring, bleeding, and recovery times. The Hugo system is currently in clinical trials in the U.S.
Despite recent challenges in revenue growth, Medtronic is expected to rebound over the long term. The company is on track to become a Dividend King in the coming years, continually growing its payouts beyond that point.
