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The Pharmaceutical Industry traditionally has been well known for good revenue generation, but recently there has been a decline in the revenue of the industry. But irrespective of the fact the industry has been able to deliver strong shareholder returns by means of attractive dividends and share repurchases. However, the aforementioned measures could not have been possible without a sustained stream of cash flows. I have picked three pharmaceutical giants that I believe are good dividend picks.

Abbott Laboratories

Abbott (NYSE:ABT) pays a quarterly dividend of $0.14 per share, yielding 1.55%. The dividend growth rate of the company over the last five years is 7.42%. The operating cash flows show a robust increase over the last five years irrespective of heavy taxes payable. The company generated free cash flows of $5.93 billion and paid cash dividends of $2.65 billion, therefore putting its payout ratio at 44.68%.

After the recent spinoff, the dividend of the company has been divided between the two separate business entities. In fact, AbbVie (NYSE:ABBV) is offering higher yield (3.6%) at the moment. However, Abbott still remains an attractive dividend stock with substantial growth potential as shown by the low payout ratio.

The total revenue for the company increased by 2.6% year-over-year; however, the cost of revenue did not show a significant increase. As a result, the gross profit and net income of the company were higher than the previous year. The company has been able to efficiently manage its costs, which has resulted in higher gross and net profit. After the spin off, the company needs to diligently manage its costs as the remaining segments such as nutritionals, devices and diagnostics are showing poor profitability compared to its peers.

Tightening of FDA regulations and expirations of patents are seen as the major challenges for the company. With these conditions and an enormously competitive drug market, ABT could face a possible decline in its revenues.

The biggest concern for the sector is the patent expiry - due to the expiring patents, about $100 billion worth of revenues will be under threat. As a result, the companies are looking to counter the issue by building pipelines. Humira is an essential drug for the company and it generates about $8-10 billion in revenues. However, the patent expiry in 2016 will bring intense competition and the revenues from the drug are likely to fall.

GlaxoSmithKline

GlaxoSmithKline (NYSE:GSK) is another leading pharmaceutical company that pays attractive dividends. The company pays an annual dividend of $2.20, yielding 4.30% based on the current price levels. Operating cash flows fell for the company in 2012 due to the deferred income taxes of about $1.6 billion. However, the cash flows have started to recover in the past twelve months, and currently stand about $250 million above the year ago level. The payout ratio for the company is above 100% based on free cash flows - the biggest reason for a fall in free cash flows is the decrease in operating cash flows. However, the situation is getting better for the company as there is some recovery seen in the operating cash flows.

The revenue of the company has been falling over the last three years. As I mentioned above, the major players in the sector are facing the problem of expiring patents, which is causing the revenues to fall for the most of the players in the sector.

GSK have previously faced quality control issues where the company had to pay $750 million to reconcile criminal and civil law complaints. One of its major products, Avandia, which was linked to causing increased risk of heart damage, caused the company to lose $460 million in lawsuits.

GSK is one of the most aggressive pharmaceutical companies in emerging countries. The company has been strategizing on scaling up its branded generics, gaining government contracts for vaccines and has been pushing patent medicines in developing countries. These developments in emerging countries will fare well for GSK in the future in terms of growth of the company.

Bristol-Myers Squibb

Bristol-Myers Squibb (NYSE:BMY) pays a quarterly dividend of $0.35 per share, which puts its yield at 3.46% at current price levels. The dividend growth over the last five has been around 5% for the company. The payout ratio for BMY is around 41% on the basis of free cash flows. The free cash flows of the company were $5.58 billion over the past twelve months whereas the cash dividends stood at $2.29 billion. The low payout ratio suggests that the company have the potential to improve its dividends in the future.

The revenues for the company have been falling over the past three years. As a result, the net income has been severely hit. However, the company has been able to report EPS in excess of $1 in each of the last three years, crossing $2 in 2011.

The company is facing increased competition from generic manufacturers. Plavix is the largest drug for the company and it has lost substantial revenue due to the increased competition from generic manufacturers. Furthermore, the revenue losses from Avapro and Avalid have caused the overall profitability of the company to come down. However, the company is hopeful that it will be able to replace the revenue losses by getting approval for the drugs that are currently in its pipeline.

BMY possesses a very strong and well funded research and development program, which has developed blockbuster drugs for the company. The recent fall in profitability has come due to the patent losses, and I believe the company will be able to bridge the gap in revenue soon.

Conclusion

Despite the problems faced by the pharmaceutical sector; it remains one of the most attractive sectors for income investors. Almost all of the companies mentioned in the article have strong cash flows, which back the dividends. In my opinion, Abbott is the best pick in the group due to the ability of the company to grow dividends. GSK should also be able to get out of the problems soon, mainly litigation related, and payout ratio for the company should come below 100%. Finally, BMY faces the most difficult task at the moment, and the company will have to find drugs to replace its current drugs that are losing patents.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.

Source: 3 Pharmaceuticals For Attractive Dividends