Economists and bankers believe a recession is on the horizon following the fresh rate hike by the Bank of Canada. A Royal Bank of Canada report said a mild recession is inevitable by the third or fourth quarter of this year, and more rate hikes are coming to bring down stubborn inflation.
With recession alarms ringing, investors could rotate towards safer sectors such as healthcare. One particular name, Medical Facilities (TSX: DR), is doing well amid a challenging environment. This little-known healthcare stock could even make you rich over the long term.
Those who invested three years ago saw their money more than double (+105.5%) in June 2023. As of this writing, the healthcare stock trades at $8.10 (+1.78% year to date) and pays a competitive 3.90% dividend. Moreover, the company hasn’t missed paying a quarterly dividend since 2011.
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Differentiating business model
This $209.33 million B.C. firm operates in the United States (eight states), owning four surgical hospitals and five ambulatory surgery centres. Medical Facilities provide an industry-leading standard of care through a diverse portfolio of highly rated, high-quality surgical facilities.
Specialty surgical hospitals handle high-volume, non-emergency surgical, imaging, diagnostic and pain management procedures, whether in- or outpatient. The ambulatory surgery centres perform planned, non-emergency procedures on outpatients.
You can’t find a company with a unique business model anywhere in the healthcare sector. Medical Facilities partners with physicians, and these physician owners (surgeons and specialists) actively run the facilities. Meanwhile, non-owner physicians can practice at the facilities.
The setup is a great value proposition for all stakeholders, including patients, payor groups, private insurers, and investors. Management commits to promoting business growth, increasing operating cash flows to support quarterly dividends and providing a secure passive income for shareholders.
Top- and bottom-line growth
In the first quarter (Q1) of 2023, facility service revenue grew 8.4% year over year to US$109.25 million. The quarter’s highlight was the US$9.66 million net income compared to the US$1.11 million net loss in Q1 2022. Notably, the payout ratio for the US$5.58 million cash available for distribution was only 36.9%.
According to Jason Redman, president and chief executive officer (CEO) of Medical Facilities, it was a strong quarter from an operational standpoint, given the higher surgical volumes at the surgical hospitals. He also notes the strong cash flow, solid income from operations, and earnings before interest, taxes, depreciation, and amortization.
Redman added it was also a good quarter from a cash flow perspective since all distributable cash flow metrics are moving in a favourable direction. The plan for the rest of 2023 is to focus on core assets, reduce overhead costs further, and evaluate or implement strategies to return capital to shareholders.
Bright business outlook
Medical Facilities is an excellent second-liner in a stock portfolio and ideal for long-term investors. The direct involvement of physician owners in facility management is a differentiating factor as it ensures best-in-class care and patient experience.
More importantly, the business should endure because of strong fundamentals and growing demand for healthcare. Management said the overall population growth and aging population in the U.S. are growth drivers.
While no industry, including healthcare, isn’t immune to recession or market downturns, medical care is an essential service. Expect Medical Facilities to remain steady and consistently pay dividends, regardless of the economic environment.
