Through the end of July 2022, S&P 500 health care stocks have produced a 13.5% annualized return over the last three years. During the same period, the broader S&P 500 index is up 11.5%. 

Translation: the so-called defensive sector can outperform during extended market uptrends. 

What about when the market heads south? Look no further than this year’s market swoon.

While the market is down approximately 13% year-to-date, the S&P health care group is down about 6%. This shows that the sector is also living up to its reputation as a relatively safe place to invest during turbulent times.

Health care’s potential to do better in both up and down markets makes it a valuable part of a long-term investment strategy. But with so many industries to choose from—pharmaceuticals, medical devices, biotechnology, to name a few—what health care areas are best?

The more important decision involves identifying companies that have the financial strength to weather the downturns and thrive when conditions improve. Our diagnosis is that these three financially healthy health care stocks appear built for the long haul.

Is CVS Health in Good Financial Health? 

CVS Health Corporation (NYSE:CVS) may be in the best financial shape of any of the drugstore retailers. With the recently acquired Aetna now firmly in the fold, the company operates a well-balanced health care business that includes pharmacy benefits management (PBM), long-term care, health care benefits, and retail. Together they generated $292 billion in revenue last year—and are expected to surpass that in 2022, marking another year of steady top-line growth.

The balance sheet has been much improved since CVS Health unloaded $40 billion of debt related to the Aetna purchase in March 2018, the third largest corporate bond sale in history. Through the end of the first quarter of 2022, there was $11.3 billion of cash and short-term investment on the books on top of roughly $6 billion in available credit facilities. 

CVS Health’s favorable earnings to interest ratios mean it is not only well equipped to meet its debt obligations, but has ample cash flow leftover to reward shareholders. Late last year, the board approved a 10% dividend hike after increases were tabled during the Aetna acquisition. CVS Health is now a couple of years away from paying its 100th consecutive quarterly dividend.

How Much Money Will Moderna Make This Year?

Moderna, Inc. (NASDAQ:MRNA) was in decent financial health prior to the coronavirus outbreak and now finds itself with an excellent bill of health. After generating $18.5 billion in predominantly Covid-19 vaccine revenue last year, it is on pace to haul in $23.8 billion this year. And with the company boasting 65% net profit margins, this is translating to some serious profits. 

Analysts are projecting that 2022 EPS will come in at around $30.00 per share. Just two years ago, Moderna recorded a $1.96 per share net loss.

Its more recent results give Moderna a lofty 68% return on equity (ROE) ratio that is among the best in the health care space. Like most biotechs, it doesn’t pay a dividend, so much of this cash will be reinvested in developing therapies and vaccines for a wide range of diseases, immune conditions, and cancers. 

While investors won’t be getting income handouts anytime soon, they are in a position to benefit from Moderna’s coronavirus vaccine springboard through future growth. Plus a new $3 billion share repurchase program should continue to provide near-term support for the stabilizing stock.

In addition to the robust income statement, Moderna has a clean balance sheet that contains $19.3 billion in cash and minimal debt. Debt comprises just 6% of the capital structure, a very low figure in a biotech industry that’s in constant search of new debt funding to advance pipelines. The company’s 1.8 current ratio is also a mark of financial health that reflects an ability to meet short-term obligations. 

Does Pfizer Have Good Financial Strength?

Pfizer Inc. (NYSE:PFE) has a diversified portfolio of treatments and candidates for oncology, immunology, and rare diseases. It is a portfolio that Wall Street estimates will produce around $97 billion in revenue this year, which would be a 19% improvement over 2021. 

This should only help what is already a business on solid financial footing. Debt is a modest 35% of the capital structure, and Pfizer’s liquidity ratios all point to ample cash on hand to address its near-term bills.

Pfizer’s 27% profit margin and 47% ROE aren’t in the same league as Moderna, but as far as mature pharmaceutical companies go, they are among the best. Unlike Moderna, however, the more established Pfizer uses some of its strong cash flow to pay dividends. About one-fourth of profits are returned to shareholders in the form of dividends. The current $1.60 annualized payout translates to a 3.2% dividend yield, which is twice the health care sector average.