Special Edition: Healthcare — From Emergency Room to Recovery Room
On this episode of The Dividend Corner, we’re going to dive deep into the Health Care sector with fellow Investment Committee member Kevin Gade, who’s part of our Health Care team. This is the first step in our journey to allow investors to look through the B&G lens and understand our positioning throughout various economic sectors. So Kevin, thanks a lot for your time today.
Nick, it’s good to be here.
The most recent sector deep dive that you shared with the committee was entitled Emergency Room to Recovery Room. Let’s start there. Can you talk about what justified that title?
Yeah, certainly. Just to level set everything, Nick, it’s been an extremely brutal five years for any sector that you can classify as defensive, whether it’s healthcare, consumer staples, or utilities, and a lot of that is rational. It’s been an extremely strong bull market with the S&P up over 100%. So, it’s natural that there’s a lot of lag to the defensive Sectors.
What that has really driven is a lot of narrowness—not only in the market overall with sectors, but as you lift under the hood, a lot of the sectors have really driven that narrowness.
For Health Care specifically, Health Care actually kept up. It was a beneficiary coming out of the COVID pandemic, as you can imagine—innovation, testing, and pharmaceuticals. But really since 2024, almost in lockstep with the election, you saw a lot of policy headwinds appear. So that’s been a big driver of the decoupling of healthcare relative to the S&P 500 over the past 18 months.
So it’s kind of election-based for now.
Certainly, yeah. Health Care being a very diverse sector, many of the industries within it almost have their own policy overhangs that they’re dealing with at this time.
That makes sense. And I shouldn’t say election-based—it’s probably more the political process, the policy-making process.
Absolutely. Certainly something we’re aware of with Health Care.
So that’s a great summary. And despite the challenges landing the sector in the emergency room, as it were, Health Care as a whole—among all the other S&P sectors—still has one of the highest Sharpe ratios. Can you provide some details about that?
Yeah, absolutely. Health Care has been a long-term contributor to innovation in the marketplace. Whether it’s improvements in longevity driven by innovation in healthcare goods and services or the demand side, there’s been a focus on health here in the United States. And more broadly, globally, there’s been a growing middle class that’s helped the demand side.
What we know from healthcare, for better or for worse for the consumer, is that it is an extremely inelastic good. It’s very much “when you need it, you need it.” So, from a business standpoint, that allows for reliability in the business model.
The combination of innovation over the past 30 years and the reliable, steady business model that many of these companies have displayed has allowed Health Care to be the third best-performing sector over the past 30 years. On a risk-adjusted basis—return per unit of risk—it’s actually in second place. That’s a key focus for Bahl & Gaynor, in addition to companies with a growing stream of dividend income and compelling returns.
That probably speaks to the value of compounding—that if you have a business model that just compounds with not a lot of variability over long timeframes, you get a pretty good outcome. You don’t need the highest absolute return, but that combination of return plus consistency is really powerful.
Absolutely. Health Care, being the second best Sharpe ratio sector, shares top-three status with Consumer Staples and Utilities. By no means do you need the best return profile. The balance of return and stability creates a very compelling profile.
I suspect healthcare also has one of the more attractive dividend yields. Does that play into it?
Certainly. Across all strategies we manage at Bahl & Gaynor, Health Care has been a key anchor for dividend yield. The reliability of income streams—thanks to healthcare’s inelastic demand—lets companies reward shareholders through stable and growing dividends.
A higher yield doesn’t necessarily mean the companies are mature or slow-growing; it reflects reliability. We actually see growth opportunities across the market cap spectrum.
It’s interesting—the dividend yield might actually more reflect the variability of opinion of the public around the ability to compound. Part of the reason that we focus on above- average dividend yields is there might be an ability to add alpha if you have a well- informed opinion about the company because there’s disagreement on its future path.
So we’re just looking for consistency of fundamentals to drive dividend growth, and that combined with a nice yield is hopefully additive to the portfolio’s objectives over time.
Yeah, I would agree with that. That’s a hallmark of our strategies—we want growth at a reasonable price.
If you go back and look at why Health Care has been down and out, we highlighted a lot of policy uncertainty that has driven compressed valuations of the sector relative to the S&P 500. There’s been an exodus of investor positioning—whether warranted or due to money chasing momentum into mega-themes such as AI.
While volatile, it’s succeeded over time. Combined with a very narrow sub-industry in healthcare, it’s been uncertain and difficult to own the space, but we’ve found many opportunities in companies offering healthy yields.
That suggests investors view uncertainty, but we have a differentiated view not shared by the market. If we have a view and a catalyst, we can take advantage of an above-average sector and its catalysts to come.
Now, there are many companies out there with higher-than-average dividend yields. We’re not here to just buy companies with high yields—we want the symbiotic relationship of getting investors paid today through dividends while owning companies growing earnings to support income growth and competitive long-term returns.
That makes sense. Thanks for indulging that sidebar about dividend yield. You mentioned some elements of the emergency-room thesis—why healthcare has landed there, narrowness, flows out of the sector, things like that. Let’s take each in kind, double-click, and talk about what we’re seeing specifically.
Similar to other defensive sectors over the past five years, as you lift under the hood of each sector, you find extreme narrowness.
In Health Care specifically, of the 75 stocks that were S&P 500 constituents over five years, only 9 (roughly 12%) outperformed the S&P 500. That’s consistent with the Pareto Principle—20% of companies drive 80% of outcomes.
While 12% isn’t extreme relative to 80/20, it shows where we are. Those 12% are very thematic—platform technologies in med-tech or anti-obesity. We’ve benefited from that, but market narrowness is at extremes.
Valuation-wise, healthcare is at an all-time low relative to the S&P 500. The largest S&P company is now equivalent in size to the entire healthcare space. Positioning is at the third percentile over 30 years. If that doesn’t tell you investors don’t want healthcare, I don’t know what does.
Okay, so why don’t we move to a happier place—the recovery room. You cited supporting themes like medical inflation and sticky utilization that might support Health Care’s recovery going forward. Can you elaborate on those?
Innovation is certainly continuing. You’ve got a sector that’s a combination of goods and Services.
On the goods side, exciting innovation in pharmaceuticals—gene therapy, anti-obesity drugs with anti-inflammatory effects benefiting diabetes and obesity alike.
In med-devices, robotic surgery has been around for a few years, but we’re still early in its adoption. There’s continued innovation paired with a massive demand driver over the next 15 years—the silver tsunami.
In 2026, the first Baby Boomer turns 80. After 80, healthcare consumption jumps. That cohort will grow 5% per year through 2040. That demand driver, combined with innovation, makes us very excited about opportunities in Health Care.
So bottom line, innovation is costly, there’s a medical-inflation element, and demographics will likely dictate higher utilization going forward.
And though healthcare might be an expense for other sectors in the economy, medical inflation and utilization are revenue for the healthcare sector.
We’re not blind to the cost of healthcare relative to the entire U.S. economy—roughly a third of non-discretionary spending goes to healthcare.
While we’re finding opportunities in innovation, we also see them down-cap, particularly in companies bending the cost curve.
Facilities such as skilled-nursing and inpatient rehab centers, physical therapy, and outpatient clinics can deliver similar care outcomes at lower cost.
Many of these facilities are compelling growth stories given the silver tsunami and their ability to reduce system costs without compromising care.
Right, and a large portion of the federal budget goes to non-discretionary items like healthcare. Even within that line item, administrative costs are a big share.
If you can get people out of costlier care settings—and perhaps AI helps bend admin costs down—that protects budgets for true innovation and better patient outcomes.
I want to go back to large cap quickly, since a lot of our exposure is pharma-oriented. The biggest risk is LOE (loss of exclusivity). How do we think about that given much of pharma’s narrative centers on blockbuster drugs that eventually lose exclusivity?
A key theme for Bahl & Gaynor in healthcare investing is revenue diversity. When innovation booms, there’s success risk—blockbuster drugs become such a large revenue share that loss of exclusivity (LOE) events matter.
We aim to avoid owning into LOE events but also find opportunities after them. Valuation often compresses heading into an LOE, making that period compelling to re- underwrite or even lean in.
Recent examples include AbbVie in 2023 when Humira came off patent in the U.S.—that was a perfect time to lean in, as the stock re-rated. Likewise, Johnson & Johnson’s 2025 event (Stelara) has led to a positive re-rating benefiting shareholders.
In the SMID space, I want to come back to cost reduction from a different angle. We already covered post-acute care—getting patients into physical therapy instead of Hospitals.
There’s also the sensitive topic of end-of-life care. You said something that stuck with me: a large portion of lifetime healthcare expense occurs at the end of life. Maybe that part of the care continuum can be optimized—humanely, of course—but in ways that benefit providers who haven’t had much spotlight. Let’s talk about that.
Certainly. We understand it’s a sensitive topic. Unfortunately, many people go through this personally. Hospice care is ultimately a family and doctor decision to provide comfort for those near end of life.
The positive side of the industry is its focus on compassion—allowing someone to live out their life in the comfort of home, surrounded by family.
There are many for-profit and non-profit providers who benefit from this model. Hospice care is growing 8 % per year—above the growth rate of the 80+ population—and saves the Medicare Trust Fund over $3 billion annually.
Okay, thanks for reviewing that. And this wasn’t on our list of discussion points, but it’s a good place to end.
We talked at the beginning about one environmental element that’s challenged healthcare—the uncertainty around regulation. That’s maybe the biggest risk to the sector overall, perceived or actual.
Any parting thoughts on how we view that risk?
I’d say it’s all about diving as deep as possible into the business model and understanding stakeholders—not just the company and its products, but the buyers and payers.
Governments worldwide play a major role. Understanding this evolving landscape is critical for investment theses.
At the same time, the high uncertainty we discussed creates alpha opportunities. The market is short-term focused, but with a reasonable time horizon, we can step into names at attractive valuations that ultimately reward shareholders.
Great, well said. So, lightning-round summary: though it’s been tough sledding for Health Care, that’s understandable—uncertainty, multiple compression, outflows—but reasons we might move from the emergency room to the recovery room include sustained innovation, demographic tailwinds, and consistent business models managing risk.
The silver tsunami, first Boomers turning 80 in 2026, and cost-curve bending initiatives all reinforce the long-term case.
We see opportunity across market-caps—pharma and medical devices in large cap, diversified care and cost-reduction plays in SMID.
If I missed anything, Kevin, you get the last word.
I think you summarized it extremely well. It’s been a difficult past five years, but we’ve held up well relative to the sector, and the future holds bright opportunities for us and our peers across the firm.
Great, well thanks for this initial tour of the Health Care sector. We really appreciate it. Great to speak with you.
Thanks, Nick.
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