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Summary Society is getting older and will need more healthcare. Fewer younger people and they have different tastes. The wise investor should pay attention to these changing demographics. Bob Dylan sang “the times they are a-changin'” in 1964, and he couldn’t have been more right. Things are indeed changing. Society is aging, every day 10,000 more people turn 65, and fewer babies are being born, the average fertility rate is now less than 1.9, almost a 50% drop off from the peak in 1959. More older, and retired, people means more spending on healthcare and leisure activities and fewer younger people means less spending on homes, cars, and other big ticket items. And the young crowd has different tastes and are more health conscious regarding food than their parents or grandparents. Demographers are saying that these trends probably will be with us for a long time, likely out to the year 2050. How will this turn of events affect investors going forward? Hint: those holding shares of companies such as Johnson & Johnson (NYSE: JNJ ), McDonald’s (NYSE: MCD ), and Universal Health Realty Income Trust (NYSE: UHT ) should pay attention. Older and wiser Pharmaceutical giant Johnson & Johnson supplies prescription drugs, consumer health items, and medical devices, which all should be in great demand for the foreseeable future. A well-performing management team has steered the company through both good and bad times by employing a successful acquisition strategy and top-notch R&D effort that has helped keep the drug pipeline stocked with a seemingly never ending supply. As of April, there were 15 different drugs in the late stage U.S. and E.U. approval phase. As soon as those patent-protected products head to market, investors can expect to start reaping the benefits, which will probably include more dividend hikes. The company, one of the few with a pristine AAA credit rating, has raised the dividend payout every year since 1963 and has been growing it at a 6.5% annual rate over the last half-decade. Shares currently yield about 2.9%, well above the rate on 5- and 10-year Treasury notes. There is plenty of room to keep the dividend flowing and growing. The payout ratio of less than 50% is modest. Johnson & Johnson will probably continue to generate consistent cash flow from operations, it was $14B last year alone, and has a low (0.2) long-term debt to equity ratio. Analysts project that earnings and cash flow will continue to increase. EPS has averaged a double-digit growth rate over the past three years, a time when many companies have struggled. Universal Health Realty Income Trust is a REIT that owns medical office buildings, urgent care facilities, and other healthcare-related properties. The company has been increasing revenue at a double-digit pace for the past half decade. Over the past year, UHT has assumed a minority interest in several other real estate firms and added four new buildings to its portfolio which should help continue the trend. Universal Health pays a quarterly dividend of $0.64 per share and the stock currently yields about 5.0%, double that of the average Dividend Aristocrat and well above what you can find in most investment-grade bonds. The company has traditionally generated adequate “funds from operations,” or FFO, a metric commonly used in the REIT industry, over the years. A recent quarterly filing indicated that adjusted FFO increased 3% to $0.72 per diluted share. The stock is not without risk. The current price/sales ratio of about 10.6 could mean that shares are a bit pricey right now. Changing tastes With fewer younger people around, companies that previously catered to this segment of the population probably will be impacted. Shareholders of retail outlets, home builders, and even auto manufacturers could see a lot of red over the next few decades. And the younger crowd has different tastes than the generations that came before them. For one thing, they want a healthier brand of fast food. This could impact old school companies, such as McDonald’s. The Oak Brook, IL-based burger giant has reported less foot traffic and lower same-store sales over the past few years. In a bid to reverse this trend, the company had to make radical changes to both its menu (for example, adding all-day breakfast and reducing the number of items) and to management (earlier this year a new CEO took over). I recently wrote an article that concluded that so far the improvements have helped stabilize things at least but will the company be able to withstand three decades of demographic headwinds? Conclusion Demographic trends indicate that up to the middle of the century things could be dicey for some companies like McDonald’s, as a smaller number of younger people spend their money in different ways than before. However, the aging of society might be a boon to the healthcare industry, which would make investors of Johnson & Johnson and Universal Healthcare Realty Trust happy. Scalper1 News
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