By Chris Seabury
For many investors, pharmaceutical stocks are one place to protect against the volatility of the markets. This is because the cost of prescription drugs has been rising dramatically. Evidence of this can be seen by looking no further than the fact that consumers paid an average cost of $198 last year. The reason why is due to the increasing demand for these products from an aging population that is becoming more reliant on these items. As a consequence of higher earnings, a number of companies have been increasing the total amount of dividends paid out to shareholders. To determine those firms that have the most stability requires an examination of some of the strongest names in the sector. These include Abbott Labs (NYSE:ABT), Merck (NYSE:MRK), Eli Lilly (NYSE:LLY), Pfizer (NYSE:PFE) and Glaxo Smith Kline (NYSE:GSK).
Abbott Labs is yielding 3.40%. The payout ratio is .425. The profitability of the firm includes profit margins of 11.48%, operating margins of 20.62% and a return on equity of 19.71%. The stock has low volatility, with the company currently having a beta factor of .32. The combination of these elements illustrates how Abbott Labs has the ability to continue paying consistent dividends to shareholders. This is because the company is paying out less than half of its earnings to stockholders in the form of dividends. At the same time, executives have been aggressively helping to increase the overall returns to investors by using the remaining portion of earnings in supporting sales growth. Moreover the stock has traded in a narrow range: Between $45.07 to $56.84. This is significant because it is showing how these elements are contributing to a consistent dividend payout. In the future, these amounts could possibly lead to an increase in dividends due to the tremendous amounts of cash, growth and return on equity to investors.
Merck is yielding 4.40% and the firm has a payout ratio of .455. The profitability of the company includes profit margins of 8.84%, operating margins of 25.87% and a return on equity of 7.52%. The stock has low volatility with a beta factor of .54. These figures illustrate how Merck is able to continue with the current dividend payout. The reason why is because the firm is paying less than 50% of its earnings in dividends to shareholders. At the same time the company is realizing consistent earnings growth and the firm has a track record of regularly paying and raising its dividends going back to the late 1970’s. Furthermore, the stock has traded in a 52 week range from $29.47 to $39. These elements are highlighting how Merck has the ability to continue with the current trends in the dividend payout and will more than likely maintain this track record in the future.
Eli Lilly is yielding 4.90% and the firm has a payout ratio of .896. The profitability of the company includes profit margins of 19.07%, operating margins of 27.06% and a return equity of 33.93%. The firm has low volatility with a beta factor of .54.These numbers are highlighting how Eli Lilly is able to continue with its current dividend payout. This is because the firm is continuing with the strong amounts of growth in profit and operating margin. Moreover, the company has a track record of consistently paying and raising the dividends going back to the early 1980s. These factors have helped the stock to remain stable, with shares trading between $33.46 and $42.03 during the last year. As a result, the strong dividend growth rates will continue in the future. This means that the yield could remain the same if not increased.
Pfizer is yielding 3.70% and the firm has a payout ratio of .349. The profitability of the company includes profit margins of 16.65%, operating margins of 27.79% and a return on equity of 11.45%. The firm has low volatility, with a beta factor of .89. These figures illustrate how the company has the ability to maintain the current dividend yield. This is because the firm is experiencing high levels of growth. Moreover analysts are estimating that the company will be able to see an increase in earnings from a number of drugs that are being introduced in Europe. This will help to balance out the earnings, with the corporation losing patent protection from Lipitor. As a result these elements are showing how Pfizer has the ability to maintain the current dividend rates in the future.
GlaxoSmithKline is yielding 4.70% and the company has a payout ratio of .743. The profitability of the firm includes profit margins of 12.02%, operating margins of 37.26% and a return on equity of 37.58%. These numbers are highlighting how the firm will be able to maintain the current dividend rate. This is because Glaxo has above average levels of growth. Recently there have been concerns that some of the company’s drugs could be losing patent protection. However, Glaxo is well diversified in other areas through a host of products that are sold to consumers over the counter to include: Sensodyne, Nicorette and Horlicks. These factors illustrate how the firm will be able to maintain the dividend payout in the future.
Clearly, the pharmaceutical sector has been a place where many investors have been able to find income and stability. However there have been concerns that the dividends could face challenges from the expiring patents for some companies (i.e. Pfizer and Glaxo). In both cases these firms have alternative revenue streams to be able to deal with these issues. While the other companies mentioned (i.e. Abbott Labs, Eli Lilly and Merck) are not facing these kinds of issues (based on the pipeline of drugs available) and their current growth rates. As a result, all of the different stocks have the ability to maintain and increase the dividend yield in the future. This will help to provide these firms with stability during some of the more volatile times in the markets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.