The healthcare industry presents a fertile shopping ground for undervalued dividend stocks. S&P 500 components Pfizer Inc. (NYSE: PFE), Medtronic plc (NYSE: MDT) and Gilead Sciences Inc. (NASDAQ: GILD) are all dividend champions trading at low multiples, relative to their growth potential. 

The healthcare sector tends to feature stability and consistent demand even in economic downturns, making it a reliable choice for income investors. 

In fact, in a 2021 study by the University of Illinois, researchers found that healthcare stocks tend to be stable across business cycles, with industry employment even increasing in some regions experiencing severe economic downturns. 

Dividend-paying companies in healthcare typically have robust cash flows and balance sheets, which helps them sustain and increase their dividend payouts over time. 

Another plus: Undervalued healthcare stocks often benefit from positive catalysts, such as positive clinical trial results, new drug approvals or technological innovations. For example, Eli Lilly & Co. (NYSE: LLY) gapped up nearly 15% in August, after the company raised full-year guidance based on strong sales of diabetes and weight-loss drug Mounjaro.

Also, with many analysts forecasting an economic slowdown in the fourth quarter, healthcare, particularly dividend payers, could be a good defensive choice. 

Here’s a look at three undervalued healthcare stocks that could provide portfolio ballast and mitigate risk, particularly during bouts of market uncertainty. 

Pfizer

The Pfizer dividend yield of 4.81% is healthy, but don’t overlook the stock’s year-to-date decline of 31.11%. 

In some cases, a falling stock price can erode shareholder confidence, trigger panic selling, and lead to capital losses, but that’s not very likely to happen with Pfizer, which guided toward 2023 revenue in a range between $67 billion and $70 billion, and earnings between $3.25 and $3.45 per share.

Those would be steep drops from 2022, and you might already know the cause: A decline in global revenue from Covid products, Paxlovid and Comirnaty.

But Pfizer, whose market capitalization of $192.36 billion has other aces up its sleeve, as its migraine treatment Vydura,  its sickle-cell anemia treatment Oxbryta, and its heart disease treatment Vyndaqel are strong contributors to revenue growth. 

Pfizer has a 12-year history of raising its dividend. After an expected yearly earnings decline for 2023, Pfizer is expected to see a 1% bump in profit growth next year. That stability is an encouraging sign for dividend investors. 

Medtronic

With a market capitalization of $108.80 billion, Medtronic is the biggest company whose sole focus is medical devices. It operates in four business units: cardiovascular, medical-surgical, neuroscience and diabetes. 

Medtronic's dividend yield is 3.38%, and the company has a 47-year track record of boosting its shareholder payout, landing it a place on MarketBeat’s dividend aristocrats stock list. 

Its products are used primarily in hospitals, surgical centers, as well as alternate care environments such as home care and long-term care facilities. A key part of its research and development is creating products that can reduce hospital stays, which, of course, is also a focus of health insurers.

In October 2022, Medtronic said it would spin off its patient monitoring and respiratory interventions businesses, part of the medical-surgical unit. The move will allow the company to focus on higher growth markets and revenue acceleration.

MarketBeat’s Medtronic analyst ratings show a consensus view of “hold” with a price target of $91.67, an upside of 12.10%. The stock currently falls into the undervalued category, relative to factors including historical multiples, past returns and price appreciation, and its future growth estimates. Wall Street expects earnings to grow by 7% next year, after an expected decline of 3% this year.

Gilead Sciences

Gilead, which specializes in treatments for HIV/AIDS and hepatitis B and C, also got into the business of developing Covid treatments. 

Revenue from its Covid drug Remdesivir fell by 62% in the most recent quarter. MarketBeat’s Gilead earnings data show the company missed bottom-line views, but beat on the top line, with revenue from cancer and HIV drugs increasing, partially offsetting the dramatic decline in Remdesivir sales. 

Sales of HIV treatment Biktarvy, Gilead’s best-selling product, rose by 24% to $2.7 billion, ahead of analysts’ estimates. Revenue from cancer treatments rose by 59% to $670 million. The margins for its HIV and hepatitis C products are stellar, and the company has a strong pipeline of treatments for a wide range of viral and inflammatory diseases, as well as cancers. 

Gilead’s dividend yield is 3.96% and the company increased its dividend for the past eight years. 

Gilead Sciences analyst ratings show a consensus of “moderate buy” with a price target of $90.05, an upside of 19%, suggesting that Wall Street believes shares are undervalued relative to their potential. 

The Gilead Sciences chart shows the stock’s year-to-date decline of 9.24%. The stock is currently correcting below its 200-day line, and isn’t actionable for investors whose primary objective is growth. However, you could treat Gilead stock differently if your chief aim is income.