In this series of articles, I will be identifying which stocks for various S&P industries are best suitable for income investors, based on dividend growth and yield. Parts 1 and 2 can be found here and here.
For Part 7, I will be taking a look at Pharmaceutical stocks. These stocks include:
- AbbVie (NYSE:ABBV)
- Actavis (ACT)
- Allergan (NYSE:AGN)
- Forest Laboratories (NYSE:FRX)
- Eli Lilly & Co. (NYSE:LLY)
- Merck (NYSE:MRK)
- Mylan (NASDAQ:MYL)
- Perrigo (NYSE:PRGO)
- Pfizer (NYSE:PFE)
- Zoetis (NYSE:ZTS)
The following stocks do not current pay dividends: Actavis, Forest Laboratories, and Mylan.
When ranking the dividend-paying stocks by yield, the order is as follows:
- Pfizer - 3.56%
- Eli Lilly & Co. - 3.27%
- AbbVie - 3.22%
- Merck - 3.15%
- Zoetis - 0.93%
- Perrigo - 0.32%
- Allergan - 0.13%
When ranking them by dividend growth over the past five years, the order is as follows:
- Perrigo - 90.91%
- Pfizer - 62.50%
- Merck - 15.79%
- Zoetis - 10.77% (Note: this only applies to 2013/2014, as the stock is a spinoff of PFE.)
- AbbVie - 5.00% (Note: this only applies to 2013/2014, as the stock is a spinoff of ABT)
- Allergan - 0.00%
- Eli Lilly - 0.00%
Based on yield, I don't feel that Zoetis, Perrigo, or Allergan are suitable as income investments. So that leaves Pfizer, Eli Lilly, AbbVie, and Merck. Out of these four stocks, Eli Lilly has seen zero dividend growth over the past five years. AbbVie has only seen 5% growth, but that is because it only takes into account the current year increase. I fully expect to see similar increases going forward.
Merck, on the other hand, has only seen 15.79% dividend growth over the past five years and 18.92% over the past ten years (compared to Pfizer's 118.5% growth over the past ten years). Considering Merck has a lower yield, I believe Pfizer and AbbVie are the best options currently for income investors.
Due to the fact that AbbVie is a recent spin-off, we have to look at very recent data when comparing it to Pfizer. You can see from the chart below that AbbVie has seen the better trend in revenue recently.
Pfizer comes out ahead when looking at earnings.
Based on both trailing and forward PE ratios, Pfizer seems to be the more attractively-priced stock.
Pfizer also has the lower payout ratio.
Pfizer has the highest yield out of this group of stocks and the second highest dividend growth over the past five years. The highest-growing dividend comes from Perrigo, but considering its yield of less than 0.50%, it is not suitable for income investors.
AbbVie has the 3rd highest dividend yield out of the group. The 2nd highest yield comes from Eli Lilly, which has seen zero growth in its dividend over the past five years, making it also unsuitable for income investors, in my opinion.
The success of pharmaceutical stocks depends greatly on the drugs they develop, get approval for, market, and sell. Both companies have a pipeline of promising products as well as associated risks related to competitors, patent expirations, etc.
Even though I believe Pfizer is the better bargain right now, I think both stocks will reward long-term income investors. As always, I suggest individual investors perform their own research before making any investment decisions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.