3 Big Pharma Buys for Dividend Investors

Investors in today's market might be starved for yield. In a low-interest rate climate along with stock prices near record-highs, traditional dividend stocks, in a lot of cases, have been bid up to where their yields are 2% or less. However, one area that hasn't seen this is pharmaceutical stocks, given their valuations are still quite low, and their yields commensurately high. We favor pharmaceutical stocks for both value and yield. On a relative basis, in a very expensive market, they look even better. Below, we'll take a look at our three top-ranked pharmaceutical stocks. Bristol-Myers Squibb Bristol-Myers is a mega-cap pharmaceutical company that discovers, develops, licenses, manufactures, and distributes its products worldwide. The company's product portfolio offers treatments for hematology, oncology, cardiovascular disease, immunology, and more. The company is the result of countless mergers since its founding in 1887, generates about $46 billion in annual revenue, and trades with a market capitalization of $136 billion. It also sports a 14-year dividend increase streak. Bristol-Myers has seen somewhat choppy earnings in the past decade, owing to the inherently volatile nature of pharmaceutical products. However, the company has a strong portfolio, led by winners such as Revlimid, Opdivo, and Eliquis, and we think that over the long-term, Bristol-Myers could produce 3% annual earnings-per-share growth. We note that results will likely not be linear as new products are launched and legacy ones lose patent protection. In addition, Bristol-Myers' acquisition of Celgene in 2019 was primarily for access to Revlimid, which comprised the vast majority of Celgene's revenue at the time. That drug begins to lose patent exclusivity next year, which will be a headwind for Bristol-Myers. Bristol-Myers trades for just 8.1 times this year's earnings estimate of $7.45 per share, which is low not only on an absolute basis, but against the stock's history as well. We project fair value at 13.5 times earnings, meaning the shares trade for just 60% of fair value today. That implies an ~11% increase in total return projections from the valuation alone, and when combined with 3% growth and the 3.3% yield, we expect robust total returns of 16.4% annually. Bristol-Myers is one of the cheapest stocks in our coverage universe, and sports a dividend yield that is well in excess of 3%, so we don't see the growth challenges as enough to warrant passing on the stock. Amgen Amgen is another pharmaceutical company that discovers, develops, manufactures, and delivers therapeutic products globally. Amgen produces products for bone health, inflammation, oncology, hematology, cardiovascular disease, neurosciences, and more. Its popular products include Enbrel, Neulasta, Otezla, and Repatha. Amgen was founded in 1980 in California, generates about $26 billion in annual revenue, and trades with a market capitalization of $125 billion. Like Bristol-Myers, Amgen sports a double-digit dividend increase streak, with Amgen's at 10 years currently. Growth has been consistently strong for the past decade, and we expect 9% growth annually going forward, which is quite high for a pharmaceutical company. Enbrel is still a major seller for Amgen, but its revenue is quite mature, and is unlikely to move the top line forward in the coming years. Newer drugs like Prolia, which is an osteoporosis treatment, and Repatha, which is used to treat high cholesterol, are the revenue growth drivers of the future for Amgen, and why we expect to see such strong growth numbers. The company also has billions of dollars of cash on its balance sheet, which it has been using to retire shares, and thereby boost earnings on a per-share basis. We expect this behavior to continue as well, helping dollar-based earnings growth towards our 9% estimate. Amgen trades now at 13 times our earnings estimate, which is slightly below our estimate of fair value at 13.4 times. That implies a very small tailwind to total returns, but in concert with the 3.3% dividend yield, we expect EPS growth to be the main driver of total returns. We see 12.4% total annual returns in the coming years as Amgen is certainly the most growth-oriented large-cap pharmaceutical company we cover. Gilead Sciences Gilead Sciences is a biopharmaceutical company that discovers, develops, and distributes medicines in niche markets globally. Gilead's philosophy is somewhat different than other pharmaceutical companies in that it attempts to capture sizable market share in areas where markets may be smaller, rather than fighting with competitors over slices of larger markets. To do this, the company produces a wide variety of drugs that treat diseases like those of the liver, certain cancers, pulmonary diseases, fungal infections, and more. Gilead was founded in 1987, generates $25 billion in annual revenue, and trades today with a $90 billion market capitalization. Gilead's dividend increase streak is more modest than Amgen and Bristol-Myers, as Gilead only began paying a dividend six years ago. Gilead's HIV franchise is what propelled it to mega-cap status less than a decade ago, but its treatments work so well that the patient pool has gradually declined. Today, it generates sales growth from products like Remdesivir, while its legacy products provide strong margins and cash flows. We like Gilead's exposure to higher growth areas like cancer drugs, as well as pulmonary diseases. The treatments Gilead goes after tend to have less competition, and therefore, higher growth when a successful drug is created. In total, we see EPS growth accruing at a rate of 5% annually, but note that like the others, growth may be a bit lumpy. The shares trade for 10 times this year's earnings today, which is below our estimate of fair value of 11 times earnings. That implies a 1%+ tailwind to total returns in the coming years, and in concert with the ample 3.9% yield, as well as 5% earnings growth, we see 10.2% annual returns for Gilead. Final Thoughts In a market with elevated valuations and low yields, we see pharmaceutical stocks as a respite from both. Amgen, Gilead, and Bristol-Myers all offer cheap valuations and yields of roughly three times that of the S&P 500. While growth outlooks vary in the sector, long-term dividend investors should find these three stocks attractive, and we rate them all a buy.

3 Big Pharma Buys for Dividend Investors

In a market with elevated valuations and low yields, we see pharmaceutical stocks as a respite from both.

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