News of game-changing drugs, treatments and vaccines may dominate the headlines when it comes to pharmaceutical stocks. But, taking a gamble with high-risk, high-possible return biotech stocks isn’t the only way to approach this sector. There are less risky opportunities in this space.
Sure, they may not generate the triple-digit percentage gains we’ve seen in recent months. But, offering the potential of solid long-term returns, they make great buys for most investors. I’m talking about “big pharma” stocks.
What’s the main appeal? Reasonable valuations are one strength. Sure, growth isn’t off the charts with most of these names. But, their relatively low forward multiples make them appealing opportunities for more value-focused investors. But, the largest strength is in their dividend generating abilities.
Consumer products, telecom, and utilities stocks may make up the bulk of great dividend plays. But, big pharma is another prime hunting ground for investors focused on generating income from their portfolios. This sector includes many high-quality, well-capitalized companies, all offering dividend yields that are very appealing in today’s near-zero interest rate environment.
So, which pharmaceutical stocks should be on your radar, if dividends are a top priority? Consider these seven compelling opportunities:
- AbbVie (NYSE:ABBV)
- Bristol-Myers Squibb (NYSE:BMY)
- Gilead Sciences (NASDAQ:GILD)
- GlaxoSmithKline (NYSE:GSK)
- Johnson & Johnson (NYSE:JNJ)
- Merck & Co. (NYSE:MRK)
- Novartis (NYSE:NVS)
Pharmaceutical Stocks: AbbVie (ABBV)
Yielding 4.97%, ABBV stock is an intriguing opportunity based upon its dividend alone. But, its fat payout isn’t the only reason this stock may be of interest. Shares could also see a gradual boost thanks to continued earnings growth this year and the next.
The pharma company, formerly a component of Abbott Laboratories (NYSE:ABT), has long been dependent on the profits from its blockbuster drug, Humira. Even as recently as last year, the rheumatoid arthritis treatment made up $16.1 billion of its $45.8 billion in annual sales. But, the company has several other drugs in its portfolio that could make up the difference once Humira goes generic.
These include cancer treatment Imbruvica, with $5.3 billion in sales last year, and leukemia treatment Venclexta, which only generated $365 million in sales last year, but saw 46.2% sales growth. Put it all together, and the company has enough in play to give shares, holding steady at around $120 per share, a boost going forward.
This may not be a stock you will get rich on. But, if you’re looking for high yield, and the opportunity for solid appreciation, keep AbbVie on your watch list.
Bristol-Myers Squibb (BMY)
With a forward yield of 2.97%, Bristol-Myers Squibb isn’t the highest-yielding of the pharmaceutical stocks. But, with its single-digit price-to-earnings (P/E) ratio (8.8x), and a payout ratio of just 26.2%, consider this a value play that could see a boost if management decides to return more capital to shareholders.
Granted, with its dividend growth rate averaging 4.62% over the past five years, it’s so far not done much to boost the payout. Yet, with a $6.4 billion share buyback plan, there’s at least something on the table that could help give BMY stock a shot in the arm.
Bristol Myers-Squibb may not be making many headlines compared to other big pharma names. Especially the ones that brought novel coronavirus vaccines to market. But, as Truist’s Gregg Gilbert made the case earlier this month, Wall Street isn’t giving this company’s drug pipeline enough credit. Per the analyst, its drug development pipeline (made up of 150 programs in clinical trials) could be worth as much as $30 per share (the stock trades for around $66 per share).
Based on analyst estimates, expect modest earnings growth (high single digits) for BMY stock in 2021 and 2022. Yet, with the buyback program, the ability to increase its dividend and, of course, the potential of multiple expansion, there’s much in play that could help send this stock, which has essentially traded sideways over the past year, toward $75 per share and beyond.
Pharmaceutical Stocks: Gilead Sciences (GILD)
Last summer, Gilead thought it had a hit on its hands with Covid-19 treatment Veklury. But, fast-forward to now, and this product is no longer helping to boost this pharma stock.
Yes, when released for emergency use, it generated around $900 million in sales between July and September 2020 alone. Yet, as it became clear demand for the drug would fall sharply short of expectations, investors bid down GILD stock, from around $80 per share to prices under $57 per share.
Since late last year, it’s slightly recovered. But, with Veklury’s success a one-and-done event, earnings are set to slightly slip over the next year. Investor interest in this play dropped like a stone. But, those buying in now may find it to be another appealing value play in the healthcare space.
Sporting a low forward P/E of 9.2x, it’s clear the disappointment from Veklury has been more than priced-in. Not only that, with its 4.3% dividend yield, you can get paid while you wait for investor interest to once again return to GILD stock. Possible gains may not be massive. But, if you’re looking for yield, with the potential for appreciation, consider this another one of the best pharmaceutical stocks out there to buy.
For now, with its 5.62% yield, GSK stock is a great dividend play. But, this may not last for long. As one Seeking Alpha contributor recently pointed out, with the company’s spinoff of its customer products segment, it’s a definite we’ll see a dividend cut in 2022. Without its portfolio of cash-cow over-the-counter brands like Advil, Centrum, and Sensodyne, it’s not hard to see why.
So, with the specter of a dividend reduction, why buy this, either for its yield, or its ability to rise in value? Some, like the analyst referenced above, may have a more cautious take on GlaxoSmithKline going forward. But, sales side analysts at U.K. firm Liberum would counter that a major ramp-up in growth for this segment is just a few years away.
Strong prospects for growth among its oncology and vaccine offerings may help turbocharge earnings through the end of the decade. With investors so far not factoring this into today’s valuation, there may be a path for this stock, which after a year of lackluster returns, could deliver in the years to come.
Buying now, ahead of the spinoff completion, gives you another opportunity as well: possible upside from said transaction unlocking shareholder value. GSK stock hasn’t set the world on fire for many years. Yet, if the aforementioned bullish forecast winds up true, it may be on the verge of making up for lost time.
Pharmaceutical Stocks: Johnson & Johnson (JNJ)
JNJ stock sports a forward dividend yield of 2.6%. Again, not the highest among pharmaceutical stocks. But, still a high yield in today’s low-interest rate environment. Not only that, as a “dividend aristocrat,” with its dividend getting raised 58 years in a row, this remains one of the highest-quality names for investors looking for yield.
Most of the news around Johnson & Johnson lately has been about its Covid-19 vaccine. After reports of blood clotting among six women who took the vaccine, distribution of it was temporarily paused. Said pause has now been lifted. But, while it’s garnered the company the most attention in recent weeks, this isn’t a make-or-break factor for JNJ stock.
Sure, it could generate $3 billion in revenues in the U.S. alone, if the federal Government fully executes its agreement to buy 300 million doses. Yet, for a company with around $84 billion in annual sales, this amount is a relative drop in the bucket. In short, don’t expect its vaccine news (good or bad) to have a material impact on the stock.
Much like some of the other pharma names discussed in this gallery, the play with JNJ stock is a slow one. That is, don’t expect shares to experience jaw-dropping gains. But, over the long term, with gradual growth in its earnings, and a solid dividend with a long track record of increases, this venerable healthcare play will likely continue to produce solid returns for investors.
Merck & Co. (MRK)
Merck is another major pharmaceutical stock offering an above-average yield. But, with shares trading around $80 per share since 2019, can investors buy this today and be confident it’ll get out of its slump, and start heading to higher price levels?
It’s possible. Sure, at around 12x forward earnings, MRK stock is cheap compared to the overall market. But, it’s in line with the valuations sported by many of its peers. Yet, with low double-digit earnings growth expected this year and the next, shares could see an upward movement if Wall Street decides this stock has been unfairly undervalued, and decides to reassess its valuation.
As InvestorPlace’s Tezcan Gecgil wrote April 2, the company has a leading portfolio of treatments. These include cancer treatment Keytruda (its best selling drug), HPV vaccine Gardasil, and anti-diabetes drug Januvia. It may have thrown in the towel in developing its own Covid-19 vaccine candidate.
But, with its current offerings, plus the potential for the possible treatments in its pipeline, Merck could be set to continue to generate solid earnings growth, and increase its dividend payout (which has grown 6.72% per year on average over the past five years). Together, these could result in this stock – stuck in the mud for the past three years – generating solid gains again for investors.
Pharmaceutical Stocks: Novartis (NVS)
Novartis is another high-yielding (3.62%) pharma play whose stock price hasn’t exactly moved much over the past few years. This is understandable, given the company’s modest earnings growth projections (around 6.3% between 2021 and 2022).
But, as InvestorPlace’s Alex Sirois wrote in March, the company may have two potential blockbuster drugs in its pipeline. These are multiple sclerosis treatment Kesimpta and cardiovascular treatment Leqvio. For Kesimpta, the company has already gotten the green light from European Union and UK regulators. The company has also obtained FDA approval as well. As Sirois broke it down, the situation for Leqvio is a bit more tricky: it’s getting rolled out in Europe.
Yet, its U.S. debut has been delayed by production headwinds. Even so, this may end up being a temporary setback. So, what’s the upshot here? Admittedly, the range in earnings growth estimates for 2021 and 2022 are a bit tight. The most optimistic sell-side projections call for earnings of $6.36 per share this year, and as much as $7.01 per share next year.
This may mean, even with the aforementioned drugs, neither one may not be a major game-changer for NVS stock. Yet, with its current payout likely safe, it may make a great opportunity for income investors. Future gains may not be massive. But, its modest earnings growth, coupled with the yield, could mean strong returns over the long run.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.