7 Big Pharmaceutical Stocks for Bigger Income
Pharmaceutical stocks with stable, substantial dividends can hold their own in almost any environment, making them ideal for long-term income investors.
Pharmaceutical stocks are getting a lot of attention these days, thanks in large part to the COVID-19 pandemic. However, investors interested in long-term returns via reliable dividends should look beyond the here and now to the structural reasons why Big Pharma is a big long-term opportunity.
To begin with, healthcare is reasonably recession-proof; patients will spend on drugs and treatments even when they cut back on discretionary items. Drug companies are uniquely positioned to cash in on this trend, too, when they offer maintenance drugs that become a regular monthly expense for many households.
Throw in research into hard-to-treat diseases such as cancer and Alzheimer's in an effort to develop the next generation of blockbuster drugs, and it's easy to see why Big Pharma has a bright future well beyond the pandemic.
The following seven pharmaceutical stocks are among the best ways to play that trend. Each offers a dividend yield that's more than the market average, and they all deliver consistency that buy-and-hold investors can appreciate.
Data is as of March 25. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
- Market value: $183.5 billion
- Dividend yield: 5.0%
Among pharmaceutical stocks, AbbVie (ABBV, $103.88) has been a bit of a laggard. Shares haven't moved much since roughly Thanksgiving. That's in part because some bigger rivals have connected quickly with COVID-10 vaccines, giving them more favorable headlines, but also because of long-term product pipeline risk as its blockbuster Humira will lose patent protection in the U.S. in about two years.
But long-term income investors should have a lot of faith in ABBV stock.
The current company was born out of a 2013 spinoff from Abbott Laboratories (ABT), where AbbVie kept the higher-margin focus as a research-based pharmaceutical manufacturer and the new Abbott focused on medical devices and consumer nutrition. Still, its roots go back more than 130 years. And perhaps more importantly to dividend stock investors, it has an enviable track record of 49 consecutive years of dividend increases thanks to consistent success.
And Argus Research points out that AbbVie is already preparing for life after peak Humira.
"AbbVie is developing new growth drivers to help offset slowing sales of Humira, still the company's largest product by revenue," says Argus analyst John Staszak. "AbbVie's oncology portfolio posted worldwide sales growth of 15.5% in 4Q20 and its non-Humira immunology portfolio posted growth of 224%.
Abbott is forecasting a 22% rebound in revenues this fiscal year, so it's hardly fading away despite recent lackluster performance. And in Q4, Berkshire Hathaway (BRK.B) announced it bought almost 4.3 million shares, proving that there is big institutional interest in this slow-and-steady stock.
- Market value: $142.0 billion
- Current yield: 2.9%
Amgen (AMGN, $246.25) also hasn't been making the big news that other drugmakers have amid the COVID-19 craze. Instead, the pharmaceutical company has been making plenty of headlines of a different kind.
Namely, in March, Amgen beat out more than a dozen other bidders to acquire cancer-focused biotechnology company Five Prime Therapeutics (FPRX) for $1.9 billion in cash. That isn't the only big-ticket deal that Amgen has been up to lately, either. In 2019, it acquired the Otezla anti-inflammatory drug from Celgene for north of $13 billion. That same year, it ponied up almost $3 billion for a stake in Chinese biotech BeiGene. And in 2020, it purchased the remaining share of a joint venture in Japan with Astellas Pharma to further improve its standing in Asia.
It all adds up to a bright future for this drugmaker as it blazes a trail with treatments for hard-to-treat cancers, blood disorders and chronic conditions such as psoriasis. But more importantly, as these drugs continue to find profitable niches, Amgen has committed to sharing those substantial profits with shareholders via generous and growing dividends.
Consider that 10 years ago, AMGN paid just 28 cents per share in dividends each quarter. Nowadays, that's up to $1.76 – an increase of almost 530%. Shares have admittedly lagged some other biopharmaceutical stocks lately, but that kind of dividend growth is a big draw for long-term income investors.
- Market value: $140.7 billion
- Dividend yield: 3.1%
A natural follow-up to Amgen is Bristol-Myers Squibb (BMY, $62.79), a Big Pharma giant that also has made a lot of acquisitions recently. In fact, Amgen's big 2019 deal to acquire the rights to Otezla happened because of antitrust concerns around BMY's jaw-dropping $74 billion deal to buy out rival Celgene.
That wasn't Bristol-Myers' only big-time deal, however, as it announced in October 2020 that it would dish out more than $13 billion to buy heart treatment specialist MyoKardia – a deal that's already paying dividends. Recently, BMY announced the FDA had accepted its new drug application for mavacamten, a treatment for symptomatic obstructive hypertrophic cardiomyopathy that it acquired via MyoKardia. "The therapy will complement the company's existing cardiovascular franchise, and we have increased our estimated peak sales to $1.5 billion from $1.1 billion based on continued positive data from EXPLORER-HCM and regulatory submission," write William Blair analysts, who rate the stock at Outperform.
With the Celgene deal alone expected to yield $2.5 billion in annual savings, it's easy to see why these transactions are so attractive to shareholders. And at $140 billion in market capitalization, BMY now has the scale and efficiency to go toe-to-toe with the biggest and best pharmaceutical stocks on the planet.
True, forecasts are only for mid-single-digit growth for the next few fiscal years. But income-oriented investors should find plenty to like in the consistent profitability and generous dividends here. Consider that BMY just marked its 12th consecutive fiscal year of increased payouts, and it has paid dividends in some form for more than a century. That speaks to the long-term potential of this stock across any market environment.
- Market value: $176.6 billion
- Dividend yield: 1.9%
To read some of the headlines lately, you'd think that Eli Lilly (LLY, $183.09) was destined for obsolescence. In late 2020, it halted its coronavirus treatment trials on disappointing results. Then, after rallying around the big potential of its Alzheimer's treatment, LLY posted study results early this year that prompted questions on whether the drug was actually clinically effective.
Shares have sold off by more than 10% in March, and as a result LLY continues to lag many of its Big Pharma peers. But long-term investors should not be scared off this stock at all – and if anything, should see the pullback as a buying opportunity now that Eli Lilly's yield is almost 2% annually based on current pricing.
"We think the recent news regarding the drug donanemab's early trials to treat Alzheimer's caused an overreaction from investors, explaining last week's sell-off," writes CFRA's Sel Hardy, who rates LLY shares at Strong Buy. "We continue to think that Eli Lilly has solid long-term growth prospects thanks to its solid brands, its focus on innovation, and its strong balance sheet."
The important thing to remember for those looking beyond day trading is that LLY is one of the 50 largest U.S. corporations by total market value, so its fates won't be determined by any one single treatment. For instance, in contrast to its setbacks of late, the company recently disclosed promising late-stage trial results for a new diabetes drug that both reduces A1C blood sugar and helps patients lose weight, allowing them to improve their health and maintain their quality of life.
Eli Lilly admittedly boasts the smallest yield among the pharmaceutical stocks on this list, but its 1.9% yield is still above average compared to the broader index's 1.5% yield. And with a deep bench of products and a best-in-class brand, income investors can have confidence in this dividend stock over the long haul – particularly after a 15% bump in payouts at the end of 2020.
- Market value: $80.4 billion
- Current yield: 4.4%
Off more than 20% from its 52-week high, Gilead Sciences (GILD, $63.99) seems to be down on its luck lately, but it could be set for a nice long-term rebound for patient investors.
Investors have been bearish amid a lack of a serious growth driver for Gilead. Earnings should grow incrementally this year, but roll back slightly in fiscal 2022. Revenue is forecast to be effectively flat both this year and next, too.
But as with so many tried-and-true dividend stocks, GILD is being discounted because of this outlook. It's one of the cheapest pharmaceutical stocks on this list from a price-to-earnings perspective, with a forward P/E of just under 9 at present. And it holds a lot of intrinsic value that makes it worth a look if you're not as concerned with breakneck growth potential.
And besides, it's not like Gilead has given up. It recently won FDA approval for its Yescarta drug in treating a rare form of lymphoma, and its already impressive HIV treatment Biktarvy received a big shot in the arm after an extended four-year clinical trial proved it is effective in the long term and is an important regular maintenance drug that patients can keep taking for many years with good results. And lets not forget Veklury (remdesivir), the first drug approved by the U.S. Food and Drug Administration to treat COVID-19.
High-growth biotech stocks and niche plays that have made a name for themselves amid the pandemic. But Gilead is a quiet but reliable biopharmaceutical stock that should keep providing generous income for many years, even if its current growth prospects won't knock your socks off.
Johnson & Johnson
- Market value: $426.1 billion
- Current yield: 2.5%
Recent approval of a single-dose COVID-19 vaccine is proof that Johnson & Johnson (JNJ, $161.97) has a lot going for it right now. But the more appealing value proposition for long-term investors is the fact that this is one of the most dominant pharmaceutical stocks on the planet, with a rich history and a bulletproof balance sheet that will ensure it keeps paying dividends for many years to come.
For starters, J&J is one of only two S&P 500 companies (tech giant Microsoft is the other) with a perfect AAA credit rating. Furthermore, it boasts more than $80 billion in annual revenue, currently sits on $25 billion in cash and short-term investments and clears $20 billion in free cash flow each year.
Forget about the short-term dynamics of a pandemic – these factors ensure Johnson & Johnson has a bright future for many years to come.
The icing on the cake for dividend investors is that it isn't just a Big Pharma play – it's also a consumer play, given its popular baby care line, skin care products and over-the-counter medications such as Tylenol. This strong backbone of sales has helped ensure at least one dividend increase per year for nearly six decades straight, making it among the rare group of Dividend Kings with the most impressive record of increasing payouts on Wall Street.
- Market value: $122.4 billion
- Current yield: 3.9%
French pharmaceutical company Sanofi (SNY, $49.18) pays dividends on a different cycle than the rest of these companies, with a big one-time payday that is dished out early in the year rather than quarterly dividends. But as the ex-dividend day is May 5, there is still ample time to get into this Big Pharma company to enjoy this year's distribution.
This global drugmaker that has products treating a wide range of diseases including rheumatoid arthritis, cancer, diabetes and rare blood disorders. It also has a consumer health care division, providing over-the-counter products including Act dental care and Allegra allergy medications. Think of it as a smaller sister to Johnson & Johnson, with a strong foundation of consumer-oriented products to supplement its prescription healthcare business.
Looking forward, SNY is a bit late with its COVID-19 vaccine as it has just entered Phase 2 trials at the end of February. However, with continued concerns over variants and chronic supply problems both in the developed world as well as poor nations that are still waiting for the drugs, there is still a lot of potential here.
At the same time, Sanofi has successfully spun off its materials and ingredients business under the name Euroapi to further focus operations on branded prescriptions. That bodes well for the long-term performance of this pharmaceutical stock as it commits more fully to this high-margin line of its business.
"We continue to expect SNY's savings initiatives to provide room for business operating margin expansion, while the continued strong uptake of Dupixent (+74% in 2020) will drive sales going forward," says CFRA's Wan Nurhayati, who rates Sanofi's stock at Buy.