Big Pharma is struggling to keep up with the rest of the market this year as tepid revenue, growth, the expiration of key patents, and the likelihood of the government imposing tighter cost controls hold back its performance prospects. But as pharmaceutical stocks lag the market this year, their depressed prices are providing buying opportunities, especially among big drug companies with strong cash flows that have a history of paying hefty dividends. Shares on large cap pharma companies, including Pfizer Inc. (PFE), Merck & Co. Inc. (MRK), Bristol-Meyers Squibb Company (BMY), Johnson & Johnson (J&J), and Eli Lilly and Company (LLY), are offering promising dividend yields, according to Barron’s.
Earlier this month, while the broader S&P 500 was yielding just 2%, the dividend yield on the big drug companies in the index was nearly a full percentage point higher at 2.9%. Pfizer is currently yielding as high as 3.71%. (We focus on five of the six pharma stocks mentioned by Barron’s).
Source: Yahoo! Finance
These higher dividend yields are a natural consequence of lower share prices, as the yield is calculated as the ratio of dividends per share to the share price. Despite the lower earnings prospects for the pharmaceutical sector, bigger companies tend to try to maintain consistency in their dividends. That means the same absolute dividend payout at a lower price; hence, a higher yield. (To read more, see: Bet on Big Pharma: A Six-Pack of Top Tier Drug Stocks).
The depressed prices may also present an opportunity for capital gains yield if these companies can weather the storm and come out with some new blockbuster drugs, one of the sector’s key drivers of growth. Senior analyst Vamil Divan of U.S. pharmaceuticals at Credit Suisse noted that while the 2011-2012 period was one of strong growth with a number of great products being launched, many of those products are beginning to mature. As they mature and competition from generic brand products rises, revenue growth begins to slow. New products protected by patents help to renew strong revenue growth.
But despite the struggles, all of the companies above have strong cash flows, ensuring their ability to maintain their fat dividend payouts. Divan thinks that these companies should be able to offer dividends that grow between 3-5% each year, essentially in line with earnings, according to Barron’s. (To read more, see: 6 Drug Stocks With Robust Dividend Payouts).