Uncertainty surrounding major healthcare legislation has caused pharmaceuticals to trade for really attractive multiples and offer great dividends. For value investors, that means it’s time to take a closer look. The inherent volatility that exists with pharmaceuticals is enough to keep most value investors away. However, at the multiples these companies are trading for it’s hard not to get interested. We’ll continue to look these pharmaceutical companies and see which best fit out value investing framework.
Pfizer, Inc. (PFE)
Earnings have been stagnant over the last few years for drug maker Pfizer. Trading at 8.5 times forward earnings, Pfizer is cheaper than Johnson & Johnson (JNJ) at 13.1 times forward earnings and slightly cheaper than Merck (MRK) at 8.8 times forward earnings. Pfizer has a strong dividend yield at 4.2% and solid 70% payout ratio. The healthcare legislation is expected to negatively impact Pfizer’s earnings but that effect is most likely already priced into the share price. The company is focused on biopharmaceuticals, animal health products and consumer health care.
Shares took a big dive at the end of May this year but have since started to recover. Of the more stable pharmaceuticals, this is one for value investors to think about. That said there might be better opportunities in the industry.
Abbott Laboratories (ABT)
Abbott Laboratories has a great track record and has historically had much less volatility compared to other pharmaceutical companies. The reason for this is that Abbott is diversified not just in pharmaceuticals but also medical products and devices. The company markets not just proprietary patented pharmaceuticals but also generic drugs. These generic drugs have much more stable cash flows than the patented drugs, so they help smooth out earnings. As a result Abbott Labs has been able to grow earnings 17.9% annually over the last five years, which is faster than other pharmaceuticals, including Bristol-Meyers Squibb (BMY), AstraZeneca PLC (AZN), and GlaxoSmithKline PLC (GSK). Abbott Labs trades for 11.4 times forward earnings and offers a 3.6% dividend yield. These numbers aren’t the best in the industry, however with Abbot Laboratories the investor is paying extra for the stability. For value investors looking for a safer pharmaceutical company, Abbot Laboratories is the right pick.
Sanofi ADR (SNY)
Earnings for French drug maker Sanofi are volatile. However, the company has managed to grow earnings 20% annually over the last five years. The dividend has grown 10.5% annually over the same time period and shares currently yield 5.0%. The company’s main focuses are diabetes, oncology and human vaccines. The management cites the company’s presence in emerging markets as a strength as well. Shares currently trade for only 7.9 times forward earnings. The company’s record for growth is solid. Management seems to have found a good niche to operate in and the company will likely be successful going forward. That said the company’s stock chart looks extremely volatile. Value investors that think they can handle the volatility should make sure they get a good entry point because this company’s shares bounce all over the place.
Johnson & Johnson (JNJ)
When it comes pharmaceuticals Johnson & Johnson is the behemoth. The company is very large and mature, and offers a wide range of healthcare products beyond pharmaceuticals. This diversification helps smooth out the company’s earnings and make it a more stable investment. Share currently trade for 13.1 times forward earnings, which is much higher than competitors Covidian PLC (COV) and Eli Lilly & Co. (LLY) at 10.7 and 8.8 times forward earnings respectively. The reason Johnson & Johnson shares cost more is obviously the stability. The company offers a 3.5% dividend yield however earnings growth has been slow, growing only 4.8% annually over the last five years. For the cautious value investor Johnson & Johnson is a good pick; just don’t expect explosive growth.
Novartis AG (NVS)
Swiss drug maker Novartis has four main operating segments: pharmaceuticals, vaccines and diagnostics, generic drugs, and consumer health products, which includes over-the-counter medicines, animal health products and contact lenses. The company has managed to grow earnings 11.2% annually over the last five years while growing dividends 20% annually over the same time period. The shares currently yield 4.0% and trade for 10.4 times forward earnings. While this company isn’t the cheapest in the industry, it is cheaper than Amgen Inc. (AMGN), Gilead Sciences (GILD) and Myriad Genetics Inc. (MYGN). Novartis is solid pharmaceutical company that has been able to manage some of the inherent volatility by maintaining a strong generics segment. While it is no easy task predicting future earnings for pharmaceutical companies, Novartis is one of the stronger ones. The main drawback is the company’s high debt levels, which may limit the company’s ability to take advantage of opportunities in the future. That said the company is worth a closer look.