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The five large pharmaceutical companies that I follow are Bristol-Myers Squibb (NYSE:BMY), Eli Lilly (NYSE:LLY), Johnson & Johnson (NYSE:JNJ), Merck (NYSE:MRK) and Pfizer (NYSE:PFE). Each is facing patent expirations that will limit sales, earnings and dividend growth over the 2011-15 period. Anticipation of this has compressed price earnings ratios and produced historically high dividend yields. Here are my projections for sales, EPS and DPS (dividends per share) for the 2011-15 period.

The dividend yields which range from 3.4% to 5.2% have caught the attention of dividend-driven investors as they compare very favorably to the 3.0% yield of the 10-year treasury note. These yields are even more compelling if you share my view that interest rates are destined to rise so that there is the potential for a decline in principal for the 10-year that would reduce total return unless the notes are to be held to maturity. Because this interest rate increase is only likely to bring us back to “normal” levels, I am not anticipating that stock prices will be meaningfully impacted by the projected interest rate rise. If this is true, the stock prices and resultant yields of these five companies should not be much impacted by a rate rise. In this case, the total return for each of these five companies should surpass that of the 10-year treasury note.

By my estimates, only Johnson & Johnson can meaningfully grow its sales, earnings and dividends through 2015 and this is my only current recommendation. I am extremely impressed by the Bristol-Myers pipeline, which I believe to be the best of these five companies. For patient investors, it's all right to buy at this price. There is the potential for price earnings ratio expansion for all of these companies as investors begin to look across the earnings valley caused by the patent expirations and focus on the period beyond 2013 when earnings could begin to grow again.

Sales Estimates for Five Large Pharmaceutical Companies CAGR
($billions) 2011 2012 2013 2014 2015 2011-15
Bristol-Myers Squibb $20.4 $18.3 $16.7 $17.9 $18.9 -1.9%
Eli Lilly $23.3 $20.9 $20.4 $20.4 $20.0 -3.7%
Johnson & Johnson $65.4 $69.1 $73.3 $77.8 $82.2 5.9%
Merck $46.2 $43.9 $44.0 $44.5 $44.9 -0.7%
Pfizer $66.4 $61.0 $61.8 $63.5 $68.0 0.6%
Total $221.7 $213.2 $216.2 $224.1 $234.0 1.4%
EPS Estimates for Five Large Pharmaceutical Companies CAGR
2011 2012 2013 2014 2015 2011-15
Bristol-Myers Squibb $2.29 $2.23 $2.28 $2.40 $2.58 3.0%
Eli Lilly $4.29 $3.55 $3.00 $3.00 $3.15 -7.4%
Johnson & Johnson $4.96 $5.47 $6.05 $6.67 $7.32 10.2%
Merck $3.69 $3.79 $3.45 $3.40 $3.42 -1.9%
Pfizer $2.25 $2.20 $2.30 $2.45 $2.60 3.7%
DPS Estimates for Five Large Pharmaceutical Companies CAGR
2011 2012 2013 2014 2015 2011-15
Bristol-Myers Squibb $1.29 $1.29 $1.29 $1.31 $1.35 1.1%
Eli Lilly $1.96 $1.96 $1.96 $1.96 $1.96 0.0%
Johnson & Johnson $2.28 $2.51 $2.78 $3.07 $3.36 10.2%
Merck $1.79 $1.83 $1.85 $1.87 $1.89 1.4%
Pfizer $0.80 $0.80 $0.80 $0.82 $0.84 1.2%

As a final way of looking at the valuations of these companies, I have calculated the price earnings ratio and dividend yields for 2011 and 2015 based on my estimates.

Price Earnings Ratio Dividend Yield
Price 7/1/2011 2011 2015 2011 2015
Bristol-Myers Squibb $29.15 12.7 11.3 4.4% 4.6%
Eli Lilly $37.67 8.8 12.0 5.2% 5.2%
Johnson & Johnson $67.30 13.6 9.2 3.4% 5.0%
Merck $35.60 9.6 10.4 5.0% 5.3%
Pfizer $20.75 9.2 8.0 3.9% 4.0%
Source: Potential Dividend Growth for 5 Large Pharmaceutical Companies: 2011 to 2015