While insurance providers and medical instrument producers are very solid investments in the healthcare industry, drug manufacturers tend to get noticed more. These companies are frequently very good investments, combining price growth with attractive dividends.
Below, I will explore Abbott Laboratories (ABT), Allergan Inc (AGN), Amgen Inc (AMGN), Johnson & Johnson (JNJ) and Novartis AG (NVS) to see if they present a good entry point for investors looking at this sector. I based my analysis on these five companies because they are all innovative market leaders with a history of strong growth.
Located in Abbott Park, IL, Abbott Labs is a manufacturer of a wide variety of prescription and over-the-counter drugs; it is also a creator of profit for investors. The company has been paying dividends without fail since 1924. While this is good news, investors today can expect even more, thanks to projected share price increases. Paying a dividend of $1.92 for an impressive 3.5% yield, Abbott's stock is expected to climb from its current $55 per share to $59.50, for an increase of over 8%. Combined with a potentially record dividend, this is one company that should have investors excited.
On a steady climb since August, the stock is nearly the top of its 52-week range of $45.60 - $56.84, a number it would break by 5% when it hits its one-year target. In spite of a 20% gain in the past year and a price to book of around 3.4, the stock seems to be poised to continue its run. Creations like an innovative baby bottle are also expected to add to the company's bottom line by attracting new customers. Such a combination makes this dividend aristocrat an excellent stock to buy at this time.
Allergan is another company that has been on a hot streak. The $27 billion company offers both prescription and over-the-counter pharmaceuticals, in addition to medical devices and cosmetic drugs like Botox. Currently trading near $87.50 per share with a price to earnings of 30 and a dividend of dividend of $0.20 (for a yield of 0.2%), the company's success seems to have some dark clouds looming in the coming months.
Allergan has experienced success in areas like its weight-loss device, the lap band. This run is coming to an end as the company announced it will stop selling the device amid accusations of false advertising and deceptive billing practices. With quarterly revenue (growing at 7.1%) and earnings (climbing at 6.3%) moving slowly, concerns over potential exposure to legal action because of the lap band could affect investor interest, already stretched by a price to book ratio of 4.99. With other viable options to be found in the business sector, I recommend holding on current positions with the company and avoiding any new ones until the situation is resolved.
Amgen is a California-based company that researches, develops, makes and markets human therapeutics, both by itself and through joint ventures with companies like Pfizer Inc, GlaxoSmithKline plc, Takeda Pharmaceutical Company Limited and more. Currently trading for around $67.50 per share, it is expected to challenge the upper limit of its 52-week range of $47.66 - $70.00 (one-year target of $71.50), while paying a dividend of $1.44 for a yield of 2.1%. As 2011 drew to a close, the company pointed out successes with its Neulasta, Embrel and Xgeva drug lines, expressing optimism that Amgen would grow again in 2012.
Predicting success for the company this year seems tricky. Xgeva has not generated benefits for patients the way the company had hoped, and its prospects for approval seem less than certain. Already sluggish at 3.4% quarterly revenue growth and an 8.6% drop in earnings, the negative publicity of a failed drug test could have a chilling effect. Investors would be wise to consider opting for a more secure option like Allergan or Abbott Labs at the current time.
Johnson & Johnson
Johnson & Johnson represents one of the largest healthcare products companies in the world, thanks to its $177 billion market and its strong presence in the areas of pharmaceuticals, medical devices and consumer products. Thanks to the unexpected success of its rheumatoid arthritis medicine, Remicade, the company exceeded expectations in 2011. My concern going forward is that while it did well last year, its success only resulted in a 6.4% rise in share price and a 3.9% quarterly revenue growth, while the company's earnings tumbled 89%. Johnson & Johnson pays an annual dividend of $2.28 for a yield of 3.5%.
While Johnson & Johnson shares have traded above its 200-day moving average for nearly two months, that number has been very flat, hardly inspiring investors to jump in and buy. The company's price to earnings ratio is near 20 and its price to book number stands at almost 3. I would recommend avoiding any new purchases of Johnson & Johnson until it is clearer as to whether the company will rebound and capitalize on the success of Remicade.
Novartis is another of the group that I see traveling a similar path with Allergan and Johnson & Johnson. All three are good companies, but the current market pressures have held back their stock price gains while pushing down their profits. Although the Swiss company enjoyed a billion dollar success with Enoxaparin, competition has been eating away at the exclusive position the drug had previously enjoyed. Novartis is currently trading at $56.50, below the midpoint of its 52-week range of $51.60 - $64.82. The stock has a one-year target of $61.39; its price to book ratio of 2 and its price to earnings ratio of just over 14 suggest that the stock is reasonably priced.
Although things look good on the surface, Novartis simply isn't thriving. A scant, 3.7% increase in year-to-year revenue led to a 46% decline in earnings. The company only saw a 1.22% increase in share price over the last 12 months, and Novartis cut its dividend from 4.2% to 2.9%. With such mixed signals, it isn't surprising that the 200-day moving average has remained virtually the same for six months. Novartis is a very good company, and it will regain its momentum, but investors who want to make money need to look elsewhere at the present time.
Getting a Prescription for Profit
These five companies all offer stability and dividends, but not all of them are strong buys right now. I would recommend Abbott Laboratories and Allergan Inc for purchase now, while suggesting that traders hold off on Amgen Inc, Johnson & Johnson and Novartis AG until they regain momentum.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.