Moody's expects an increasing number of healthcare companies to initiate dividend payments to shareholders as investors place higher value on immediate, stable income amid today's low interest rate environment, according to the new special comment "Peer Pressure Will Drive More Healthcare Companies to Pay Dividends."
Moody's says that more rated healthcare and life science companies have begun paying dividends in the last year than in the previous five years combined. Moody's expects this trend to continue and notes possible candidates for new dividend programs include Laboratory Corporation of America Holdings, Life Technologies Corp., Celgene Corp., Biogen Idec Inc. and CareFusion Corp.
"Investors dissatisfied with current low interest rates are increasingly interested in generating immediate income from dividends, as companies generate cash amid low revenue-growth prospects," said Jessica Gladstone, a Moody's Vice President - Senior Analyst and author of the report, in a press release. "Healthcare companies will find themselves pressured to initiate or increase dividends as their peers begin paying out."
While a new dividend program alone does not generally lead to credit quality deterioration, Moody's says it can signal a shift in financial policies and may be accompanied by more aggressive moves such as acquisitions or share buybacks.
Pressure to make dividend payments may also squeeze lower-rated companies in the industry with greater business risk and cash flow volatility, says Moody's. Moody's sees companies in the Ba rating category as more likely candidates to pay dividends as many B1 or below rated peers will be unable to initiate dividends owing to insufficient cash or restrictions in bank agreements.