Income-oriented investors should consider adding large-cap drug and biotech stocks to their portfolios, Barron's reports. Despite mounting pushback on prices from insurers and government officials, these companies still generate robust free cash flow, per Barron's. Additionally, Barron's cites research from Morgan Stanley (MS) indicating that tax reform will deliver a big boost to the pharmaceutical sector. (For more, see also: 4 Top Pharmaceutical Stocks for 2018.)
In particular, they note, the new reduced tax rate on repatriated overseas cash may lead to increased dividends. More specifically, according to research by Goldman Sachs Group Inc. (GS), health care companies are prominent among the 20 corporations with the most overseas cash relative to their market caps.
From Goldman's list, Barron's selected six pharmaceutical and biotech stocks that, in their opinion, should be especially attractive to dividend-seeking investors. These stocks are, with their yields as of January 18:
Barron's made these choices partly based on their assessment of "strong growth prospects, promising product pipelines, and good dividends that should keep growing." The dividend payout ratios for these companies, based on their most recently reported fiscal years, range from 34% for Amgen to 58% for Lilly, with the others clustered around 50%, per data from FactSet Research Systems Inc. used by Barron's.
Eggs in One Basket
AbbVie produces Humira, a drug for conditions such as rheumatoid arthritis. The good news is that it's a blockbuster. Analysts expect global sales of $18 billion in calendar 2017, up 14% from the prior year, per Barron's. More good news is that rival biotech firm Amgen has agreed not to launch a biosimilar, or close copy of Humira, in the U.S. market until early 2023, Barron's adds. This postponed competition is critical since Humira accounts for about 66% of total revenue for AbbVie. There's the rub: right now the company is riding on the fortunes of just one drug.
Bristol-Myers Squibb, meanwhile, has made a big bet on immunotherapy anticancer drugs such as Opdivo, Barron's says. Sales of Opdivo were about $4.8 billion in 2017, per Barron's, up 30% from the prior year, and around 23% of total revenue.
J&J is at the other end of the spectrum, in more ways than one, per Barron's. It has the lowest payout of the group, but offers a "well-rounded portfolio of drugs," Barron's observes. They add that J&J has been increasing its dividend at an average annual pace of 7% that should continue.
The Other Three
For Pfizer, Morgan Stanley expects "accelerating revenue growth next decade, as patent-expiration issues pressures fade in 2020 and beyond," as quoted by Barron's.
Regarding Amgen, the company holds about $36 billion in overseas cash, per estimates by Goldman as reported by Barron's.
Eli Lilly may divest its animal health division, which has global sales of $3.2 billion. While this represents about 14% of total revenues, the loss of this division should not be a negative going forward, per analysis by Morningstar Inc. quoted by Barron's.
Dividends Still Matter
As share prices rocketed upwards in 2017, more investors started focusing entirely on the prospects for capital gains, ignoring dividends. This probably is a shortsighted view. More than one-fifth of the total return delivered so far by the S&P 500 Index (SPX) in the current bull market has come from dividends, despite the fact that the dividend yield on the index has been near historic lows. (For more, see also: Why Dividend Stocks Are Losing Their Magic.)
Moreover, dividend-paying stocks offer the prospect of increased payouts over time, versus static interest payments on bonds. Investopedia recently looked at six such stocks that are expected to announce increases in the next few weeks. (For more, see also: 6 Dividend Stocks Poised for Stellar Payouts.)