The bad news? If MRNA and PFE weren’t part of your Pharmaceuticals investment portfolio, last year was tough. The good news? Experts expect to see Pharma values bounce back – historically, it is rare to see two low years in a row. Analysts also say top health care names are poised for a resurgence in 2022.
Despite all that, there are 3 Pharma stocks that still consistently yield over 3-percent, with conservative payout ratios. Keep reading to find out who they are – you’ll probably recognize one or two.
Riding the Rollercoaster
Pharma stocks performed relatively poorly in 2021. The SPDR S&P Pharmaceuticals ETF (XPH) was down about (-10.5%), and the SPDR S&P Biotech ETF (XBI) was down about (-20.4%). The industry faced headwinds in 2021 as hospitals delayed procedures and elective surgeries. These delays impacted revenue and income for pharma stocks. In addition, rising infections in late 2021 renewed concerns about whether sales and earnings growth would normalize in 2022 or not.
Despite a recent uptick in stock prices, pharma stocks are still down or flat for the trailing 1-year. Moreover, compared to the S&P 500 Index and the NASDAQ, pharma stocks underperformed last year. The S&P 500 Index was up about 27%, and the NASDAQ was up roughly 21.4% in 2021. This deficit has made pharma stocks a value for investors. In addition, some pharma stocks are yielding over 3%, with conservative payout ratios adding to the attraction.
Three pharma stocks for investors to consider for their portfolios are Merck (NYSE: MRK), Amgen (NASDAQ: AMGN), and Bristol-Myers Squibb (NYSE: BMY). All three stocks are dividend growth stocks with 10+ years of dividend growth.
Merck – A Cash Cow
Merck is one of the largest pharma companies in the world. The company has key franchises with Keytruda (cancer immunotherapy), Januvia (diabetes), Gardasil (HPV), Pro Quad (MMR vaccine), Varivax (varicella vaccine), Bridion (muscle relaxant), and Pneumovax 23 (pneumococcal vaccine). Keytruda is Merck’s number one selling drug, with an estimated $17 billion in sales in 2021. The drug is key to Merck’s growth, and the company is expanding the number of indications. Additionally, the US patents don’t expire until 2028.
Merck has faced some recent setbacks with delays of clinical trials, discouraging efficacy results for Molnupiravir (antiviral), and probable generic competition for Januvia. However, Merck’s R&D strengths and the recent acquisition of Acceleron are restocking the pipeline, especially in oncology. This fact portends well for Merck’s shareholders.
Merck’s forward dividend yield of ~3.4% is supported by a solid free cash flow of approximately $8,158 million in the last 12-months. Earnings per share cover the dividend, and the payout ratio is conservative at about 47%.
Merck’s last quarterly dividend increase was ~6.2% to $0.69 per share from $0.65 per share. The dividend growth rate was 7.4% CAGR in the past 5-years. Merck has raised the dividend for 11 consecutive years, and the FCF and low payout ratio support future increases. The valuation is reasonable at a price-to-earnings (P/E) ratio of 14X.
- Ticker: MRK
- Market Cap: $205.6 billion
- Annual Dividend Rate (FWD): $2.76
- Dividend Yield: 3.6%
Amgen – High Dividend Growth
Amgen is the largest biotech company globally. The company has a portfolio of solid therapies, including Neulasta (neutropenia), Enbrel (autoimmune diseases), Prolia (osteoporosis), Xgeva (fracture in cancer patients), Kyprolis (multiple myeloma), Repatha (cholesterol), and Aimovig (migraines). Several of these drugs are blockbusters with more than $1 billion in sales and growing.
Amgen’s stock price has struggled because investors are concerned about declining sales for Neulasta and Enbrel. Neulasta is experiencing increased competition from biosimilars, and Enbrel’s branded competition is viewed as more effective.
However, Amgen has a solid pipeline. The company bought Otezla (immunology), a blockbuster drug. In addition, Lumakras (lung cancer) and Evenity (osteoporosis) recently received regulatory approval. Furthermore, Amgen has several oncology and immunology therapies in Phase 2 or 3 trials that should lead to one product launch per year even after accounting for attrition.
The company is known for its high dividend growth rate, and the compound annual growth rate (CAGR) is ~31.7% in the past decade, approximately 17.1% in the past 5-years, and around 18.6% in the trailing 3-years. Amgen’s forward dividend yield is ~3.3%. In addition, the payout ratio is relatively conservative at ~46%, leaving room for future increases. Amgen is trading at an earnings multiple of ~14X.
- Ticker: AMGN
- Market Cap: $132.6 billion
- Annual Dividend Rate (FWD): $7.76
- Dividend Yield: 3.3%
Bristol-Myers Squibb – A Leader in Oncology
Bristol-Myers Squibb is a large pharma company that acquired Celgene for $74 billion in 2019, creating a leader in oncology. Significant drugs include Opdivo (cancer), Yervoy (melanoma), Revlimid (multiple myeloma), Pomalyst (multiple myeloma), Eliquis (stroke), Orencia (RA and psoriatic arthritis), Abraxane (chemotherapy), and Sprycel (leukemia).
Bristol-Myers faces competition for many of its therapies and loss of exclusivity for some top sellers in a few years, causing investors to hesitate about this stock. Furthermore, the company had little success for its coronavirus treatments ceding ground its competitors. As a result, Bristol-Myers’ stock price has been flat for years. However, revenue, free cash flow, and non-GAAP earnings per share have increased. Hence, the valuation is low at about 8.7X.
Bristol-Myers is not standing still, though. The company’s three top-selling drugs, Revlimid, Opdivo, and Eliquis, are still growing. In addition, the pipeline has four therapies in late-stage clinical trials: Reblozyl (blood disorders), mavacamten (rare diseases), deucravacitinib (immunology), and relatlimab (cancer). If successful, these drugs should drive growth.
The dividend yield is about 3.3% and is supported by a low payout ratio of ~29%. This low value bodes well for future dividend increases and provides confidence in dividend safety. In addition, Bristol-Myers has raised the dividend for 15 years.
- Ticker: BMY
- Market Cap: $144.1 billion
- Annual Dividend Rate (FWD): $2.16
- Dividend Yield: 3.3%
Disclosure: Dividend Power is long AMGN.
Disclaimer: Dividend Power is not a licensed or registered investment adviser or broker/dealer. He is not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.