Pharmaceutical companies currently present an interesting opportunity for value investors. Under normal conditions, investing in pharmaceuticals can feel like a gamble betting on a company’s research pipeline. New drugs are subject to FDA approval, which is a lengthy and unpredictable process, and old drugs are subject to patent expirations that can impair income streams. These two facts make it hard to evaluate a pharmaceutical company. A failure innovate will quickly spell the end for these companies, while strong innovation can rapidly grow earnings. Currently the companies are very cheap and offer great dividends. At five times forward earnings it doesn’t take much growth to make investments profitable. That is what makes it a good time for value investors to start looking at pharmaceuticals. We’ll take a look at 10 companies in the pharmaceutical industry currently paying great dividends and see which ones value investors should be evaluating.
AstraZeneca PLC (AZN)
The fundamentals for major drug maker AstraZeneca look great. The company’s products focus on cardiovascular, gastrointestinal, infection, neuroscience, oncology and respiration & inflammation. With these products the company has been able to grow earnings 13.9% annually over the last five years. The company currently offers a 5.7% dividend yield, which has grown 14.4% annually over the last five years. Even better, the company’s shares are trading for only 6.5 times forward earnings, which is less the half of what Bristol-Myers Squibb Co. (BMY), Johnson & Johnson (JNJ), and Myriad Genetics Inc (MYGN) trade for. AstraZeneca looks like a tremendous investment opportunity for value investors. Despite the volatility that plagues most pharmaceutical companies, AstraZeneca has a strong management team that has been able to provide stability. When buying pharmaceutical companies, investors are not buying the current drug line-up but instead buying the pipeline that will allow to company to continue growing. Take a good look at this company; it likely won’t stay this cheap for long.
Eli Lilly & Co. (LLY)
Eli Lilly & Co is another major pharmaceutical company that has been posting strong fundamentals since 2008. After losing $1.89 per share in 2008, the company rebounded to earn $3.94 per share in 2009 and $4.58 per share in 2010. Analysts are expecting this year to come in below 2010’s earnings, and still shares trade at 8.8 times forward earnings. While the projected decline in earnings is not a good sign, Eli Lilly has beat earnings three of the last four quarters. The company offers a 5.1% dividend yield, which is better than competitors Abbot Laboratories (ABT) and Merck & Co. Inc. (MRK). Due diligence is always needed to understand the research pipeline, however this company has an extensive list of products and segments: neuroscience, endocrinology, oncology, cardiovascular, and animal health. This diversification and cheap valuation makes Eli Lilly another good pharmaceutical company for value investors to consider.
GlaxoSmithKline PLC (GSK)
Unlike the first two companies mentioned, GlaxoSmithKline has not experienced strengthening fundamentals. The company offers a 4.8% dividend yield, however shares trades at 12 times forward earnings. This 12 times price multiple is much higher than others in the industry like Novartis AD (NVS) and Sanofi ADR (SNY). Another bad sign is that the company’s earnings have experienced a 17.2% annual decline over the last five years. There are better picks in the pharmaceutical industry. Value investors should look elsewhere. GlaxoSmithKline shares will likely fall so as to trade for a multiple more in line with others in the industry.
PDL BioPharma, Inc (PDLI)
PDL BioPharma is a specialized biotech company that creates humanized antibodies. The main application for these humanized antibodies is for cancer treatment because the antibodies can be targeted to attack specific cells. Currently trading for only 5.0 times forward earnings, PDL’s shares are significantly cheaper than competitors, Amgen Inc. (AMGN), Celgene Corp. (CELG), and Gilead Sciences (GILD) which trade for 11.3, 20.4, and 10.8 times forward earnings respectively. PDL also offers a 10.5% dividend yield, however the payout ratio is over 100% so it’s hard to speculate about the dividend’s sustainability.
PDL is less diversified than other pharmaceuticals, but it has significant competitive advantages due to the company’s patented process for creating humanized antibodies. The company has extremely high margins and it’s hard to see why those would shrink in the near term. The financials show an interesting situation where the company has negative equity, a condition the company has had for a few years now. Looking at the cash flows the company is continuing to make large payments to pay down debt. That said it’s hard for profitable companies to go bankrupt. Value investors should obviously do their due diligence to manage the risks of this company, however it looks promising.
Bristol-Myers Squibb Company (BMY)
Bristol-Myers Squibb is the most expensive of the five stocks reviewed, trading for 14.2 times forward earnings. The company does offer an attractive 4.1% dividend yield. However, shares have been on tear lately, meaning value investors should wait for a better opportunity to buy. Bristol-Myers Squibb makes pharmaceuticals for a range of significant medical needs: Alzheimer’s disease, Atherosclerosis/thrombosis, Cancer, Diabetes, Hepatitis, HIV/AIDS, Obesity, Psychiatric disorders, Rheumatoid arthritis, and Organ transplant rejection. This company is trying to solve the major medical problems in the world. That means should the company succeed, the payoff would be handsome. That possibility of success increases the upside of the company but also makes it more of a gamble. Value investors shouldn’t be investing in gambles. The company is solid but shares are trading at too high of a multiple to forward earnings. For investors who believe in this company, they should wait to buy on a dip. The stock chart looks like it is ready for a pullback.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.