The pharmaceutical industry is both disliked and appreciated. High prices drive the dislike while the industry's ability to affect everyone's health and well-being makes it highly valuable to consumers.
The industry faces lots of pressure from government, insurance companies and corporations that must pay for their employees' drugs, to lower prices and improve the efficacy of pharmaceuticals. Yet the industry remains highly profitable. Investor expectations are propelling drug companies to buy fast-growing competitors, and the industry set a record for deal making in 2015 of $462.2 billion, according to Michigan State University's GlobalEDGE blog.
Perhaps more than many other industries, pharma faces significant challenges and opportunities. Yet being enormous and highly profitable makes it a desirable place for most investors to consider making an investment. Pharmaceuticals can help not just you feel better, but your portfolio as well.
Years ago, I created a series of automated investment strategies based on how well-known investors decide where to put their money. One of these is based on the writings of James P. O'Shaughnessy, and it is this strategy that is very positive about the pharmaceutical industry.
First, let me tell you about this strategy. It looks for market caps north of $1 billion. Admittedly, in the pharmaceutical industry, if you do not have a market cap in excess of a billion, you are probably on life support. Cash flow is the lifeblood of any business, and this strategy looks for companies with cash flows that exceed the market's average cash flow per share, which is $1.73. Further, it wants the number of outstanding shares to be greater than the market average, which today is 639 million shares. Then it looks for trailing 12-month sales that are 1.5 times the market's mean, which is about $21 billion.
Quite a few companies meet these four criteria, so to pick the truly worthwhile ones, the strategy has one more variable: dividend yield. Among the companies making it over the first four hurdles, it gives the highest rating to the 50 companies with the highest dividend yields.
Here are three Big Pharma companies that earn the highest grades from my O'Shaughnessy-based strategy, along with their dividend yield: GlaxoSmithKline (GSK), $5.81%; Roche Holding (RHHBY), 3.22%; and Novartis (NVS), 3.55%. All of these are major forces in the pharmaceutical industry, are well run, competitively strong and worthy of entering your portfolio.