Analyzing Susquehanna's Top Dividend Stocks: 4 Potential Longs, 1 Neutral

 |  Includes: ABT, BMY, JNJ, MRK, PFE
by: Rash Menaria

Susquehanna Trust & Investment Co. is a subsidiary of Susquehanna Bancshares, Inc. and is affiliated with Valley Forge Asset Management Corp. The firm provides personal trust, employee benefit and investment management services to clients in Pennsylvania, Maryland, and New Jersey.

Susquehanna Trust & Investment Co. employs a GARP approach to investing. The firm primarily invests in large-cap companies across various sectors. The stock selection process begins with a top-down analysis of current and projected market conditions including commodity price forecasts, estimates for growth in major economies, interest rates, currency prices, PPI, CPI, GDP and other macroeconomic factors. A bottom-up, fundamental and technical analysis is then conducted.

The firm examines balance sheets, debt obligations, and relative valuations such as P/B, P/S, P/E and other fundamental metrics. Company cash flows trends, quarterly earnings consistency, market position, dividend yields and other relevant fundamental information are also examined. Key investment criteria include Solid fundamentals; Strong management; Stable earnings; and Reasonable valuations.

The following is a list of top high yield stocks Susquehanna is holding according to their most recent 13F filing with SEC.



Shares Held as on 12/31/2011


Johnson & Johnson




Bristol-Myers Squibb Company




Pfizer Inc.




Merck & Co. Inc.




Abbott Laboratories




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Of the above stocks, I would recommend going long on Johnson & Johnson, Pfizer, Merck and Abbott Laboratories. I also like Bristol-Meyers Squibb and believe the stock can deliver upside if its pipeline continues to deliver. However, given its high valuations (~17x Forward PE) I would prefer to be on the sidelines and have a neutral rating on the stock.

Johnson & Johnson engages in the research and development, manufacture and sale of various healthcare products worldwide. It operates in three segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics.

J&J's recent earnings results and guidance for 2012 show signs of improving fundamentals across its businesses. On the pharmaceutical front, in 2011, J&J received key product approvals for several of its drugs including Incivo, Zytiga, Edurant and Xarelto. These launches are expected to drive solid growth and improve margins through 2012. There is also sequential improvement on McNeil's situation as J&J works through its Consent Decree with FDA. Looking at its MD&D business, volume trends seem to be improving as physician office visits are stabilizing.

Despite FX pressures and a tough environment, J&J has posted good top line growth in Q4 and is expected to continue to outperform its peers, driven by a robust pipeline of drugs in the near term. I recommend a buy.

Pfizer is a research-based, global biopharmaceutical company. Pfizer's stock price has seen a good 20% appreciation in last 6 months, and I expect it to continue its upward trend going forward. I am bullish on Pfizer because of management's commitment to enhancing shareholder value through dividend and buybacks, and the company's improving product pipeline. Pfizer increased its quarterly dividend by 10% to $0.22 from $0.20 in Q4, and authorized an additional $10 billion share repurchase program with $5 billion in repo expected for 2012.

Pfizer is likely to generate ~$20B in free cash flow in 2012, so even with the dividend of ~$6.5B and share buyback of $5B, there is still plenty of room for inorganic growth through M&A. In addition, Pfizer entering an interesting new product launch cycle with four $1+ bn opportunities including Xalkori, Eliquis, tofacitinib, and Prevnar 13 adult, which could provide organic growth catalysts for the company.

I also like Merck given the defensive nature of its business and its low valuations. The stock has outperformed S&P 500 (NYSEARCA:SPY) in the last 6 months, gaining over 22%. I believe this outperformance will continue going forward as investors realize the significant discount the company is trading at versus other large cap pharma names.

Abbott Laboratories is a global diversified pharmaceutical and healthcare product company. It engages in the discovery, development, manufacture and sale of healthcare products worldwide. The company's drug portfolio includes Humira, Norvir, Depakote and Synthroid. Abbott is also a leading player in nutritional supplements and diagnostic systems.

I like Abbott because of the announced spin-off of its pharmaceutical business. This move is likely to create more value for shareholders through focused execution and better use of capital. The spin-off is expected to occur by the end of this year.

From the fundamental perspective, Abbott's business is also seeing good trends. Abbott reported strong 4Q 2011 results ahead of street's estimates and provided a healthy 2012 guidance driven by organic growth and higher gross margins. Going forward, Abbott is expected to continue delivering solid earnings results, as Humira is likely to continue to post strong sales with market gains in under-penetrated markets and Abbott's recent global expansion in emerging markets. Abbott management also noted that they will resume share buyback in 2012, hinting that its stock is currently undervalued.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.