The US health care industry has outperformed the S&P 500 for two decades, creating more than $700 billion in shareholder value creation since 1985. This strong overall growth, however, does not mean the industry's performance has been uniform across companies and subsectors.
To understand the industry's performance at a more detailed level, we examined nearly 1,900 publicly traded health care companies from 1985 to 2007. At the core of our analysis is a detailed breakdown of each company's total returns to shareholders (TRS). Not surprisingly, an analysis both of fundamental factors (sales growth, margin changes, and the capital needed to sustain growth) and of capital market factors (initial price-to-earnings ratios, changes in P/Es, and levels of dividend payouts) showed that over the long run, good performance drives TRS. Over shorter periods, however—and particularly over the past ten years—changes in expectations as measured by P/Es have outweighed the impact of growth in earnings themselves.
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