This is the first article of a dividends by sectors series, which will scout out the best quality companies in a given sector that pay greater than a 3% dividend yield. Within the healthcare industry, the big pharmaceutical companies offer the best yields. With relatively low costs outside of research and development, drug manufacturers are able to payout to shareholders by generating high margins. The tradeoff when investing in "Big Pharma" is limited earnings growth opportunity, as tighter regulations along with fewer breakthrough discoveries weigh down the industry.
AstraZeneca PLC (NYSE:AZN) - AstraZeneca is a British drug manufacturer that has a lineup of blockbuster drugs for a variety of ailments. The cardiovascular dug Crestor is the leading seller, accounting for 17% of revenues. The patent lasts until 2016. The company also has a large presence in gastrointestinal drugs (Prilosec and Nexium) along with respiratory and cancer related medicine. Growth is a concern for the company as there has been a lack of newly patented drugs to replace previous bestsellers such as Prilosec, which now has generic competition. Outside of growth, the company's financials are healthy with $9.13 per share in cash (stock currently ~$49 per share), an ROIC of 21%, a 24% profit margin, and 5.18% dividend yield. Margins should continue to improve as manufacturing operations are in the process of being fully outsourced by 2017.
Bristol-Myers Squibb Company (NYSE:BMY) - Bristol Myers Squibb is an American pharmaceutical company that produces medicine and treatments for cardiovascular disease, HIV/AIDS, schizophrenia, hepatitis, cancer and rheumatoid arthritis. Its best selling drugs are the blood thinning Plavix, Abilify to treat schizophrenia, and Reyataz to treat HIV. Unlike competitors such as Merck, Eli Lilly, Pfizer, and AstraZeneca, BMY has six newer drugs in the pipeline to replace old bestsellers when they become generic. Its 4.75% dividend yield is lower than AZN's, but the company has more growth (or lack of earnings decline) prospects to make up for it. Bristol Myers Squibb also has a high ROIC of 20% and 24% profit margins.
Trinity Biotech (NASDAQ:TRIB)- As a small cap biotech stock based in Ireland, Trinity Biotech has significantly more risk than the big drug companies, but a much larger reward. TRIB produces diagnostic test kits and instruments for sexually transmitted diseases such as HIV. Since it produces machinery and doesn't deal with the FDA it has less regulatory risk than big pharmaceutical companies. Financially the company is undervalued and healthy. It has no debt and is trading with P/E of just 3.46. With earnings growth expected to be 11% over the next five years, the company has a PEG of just 0.3. Even for the high margin healthcare industry, Trinity Biotech's ROIC of 47% and 67% profit margins are exceptionally strong. The company also pays a 4% dividend on top of all this. Overall, TRIB has significant risk due its exposure to PIIGS nations (Ireland in particular), but this company has strong growth opportunities by expanding its HIV testing more into disease ridden emerging markets and has extremely strong profitability.
Overall, healthcare can be a volatile sector, but high margins in the pharmaceutical industry translate into strong yields for income investors. However, these are not for the passive investor as patent expirations or the discovery of the next blockbuster drug or medical technology product can vastly change the fortunes of one these companies. Out of these three companies, I like TRIB the best, followed by BMY and AZN the least. However, before buying Trinity Biotech, wait for the dust to settle with the PIIGS debt situation as it causing even the best companies in Europe to under perform.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.