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By Fani Kelesidou

Despite accelerating pressures due to uncertain regulatory reforms, the U.S. pharmaceutical industry remains a major engine of economic growth. This sector includes 3,810 companies with combined annual revenue of $209 billion. For 2012, the sale of brand name pharmaceuticals is estimated to generate $156.3 billion in revenue. Overall, the healthcare sector is one of the most stable ones. The demographic and structural drivers of demand in healthcare suggest that the industry will continue to pursue positive growth rates. The industry is also highly concentrated. The largest fifty companies account for more than 80 percent of total revenues.

Here I review 5 companies which meet the following criteria:

  • Headquartered in the U.S.
  • Have a minimum market capitalization of $50 billion.
  • Have a maximum price-to-earnings ratio of 25.
  • Have a minimum dividend yield of 3.50 percent.

I also estimated the fair values of these companies based on FED+ valuation technique. Data is derived from ycharts and finviz. While there are numerous drug manufacturers listed on the NYSE, only the following larga caps fit the above criteria:

Bristol-Myers Squibb (NYSE:BMY): Formerly known as Bristol-Myers Company, BMY is a leading pharmaceutical company focused on the development and delivery of innovative medicines. It was founded in 1887 and is headquartered in New York. Among other achievements, BMY was recognized in the 2009 Dow Jones Sustainability North America Index of leading sustainability-driven companies. In 2011, R&D Directions magazine granted BMY with the title "Most Innovative Pipeline" within the pharmaceutical industry. For 2011, the company recorded $21.2 billion in net sales and invested approximately $3.8 billion in research and development.

Bristol-Myers has a market cap of $55.32 billion. Price-to-sales ratio is 15.84. In Q2 2012, net sales fell by 18 percent. This decrease was primarily attributed to the patent expiration of Plavix, and Avapro/Avalide. Apart from these two, net sales increased by 8 percent compared to the same period in 2011. 5-year average sales growth rate is positive and stands at 5.56 percent. Operating cash flow increased by 7.7 percent year-over-year. Moreover, the company has a net profit margin of 23.79 percent. Long-term debt-to-equity ratio is 0.32, the lowest in the last five years. Return on assets ratio is above the industry's average of 7.40 and stands at 11.07 percent. Currently, BMY is trading at $33 with a dividend yield of 4.13 percent and a payout ratio of 64.50 percent.

  • EPS Growth Estimate: 3.4%
  • FED+ Fair Value Range: $23 - $32

Bristol- Myers's recent dividend payments per share are as follows:

Oct. 3

$0.34

July 3

$0.34

April 3

$0.34

Jan. 4

$0.34

Johnson & Johnson (NYSE:JNJ):Founded in 1886, New Jersey based JNJ provides a variety of health care products all over the world. The company, through its subsidiaries, operates in three business segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics. It holds a network of 250 companies spread around 60 countries and employs approximately 128,000 people.

Recently, the company was targeted for improper promotion activities that caused it $181 million in settlement charges. Even though JNJ had set aside funds to cover the expected settlements, its competitive position was impacted negatively. Interestingly, investor sentiment remains positive about the stock. Analysts estimate a 6.0 percent increase in quarterly revenue for the third quarter. The full year's average projections suggest that revenue will come in at $67.17 billion and EPS at $5.06.

The market capitalization of JNJ is $187.40 billion, and P/E ratio is 21.65, while forward P/E is 12.43. 5-year average projected EPS growth stands at 6.69 percent. With a gross profit margin of 68.45%, Johnson & Johnson has a dividend yield of 3.59% and a payout ratio of 72.71 percent.

  • EPS Growth Estimate: 6.3%
  • FED+ Fair Value Range: $55 - $76

Recent dividend history is as follows:

Aug. 24

$0.61

May 24

$0.61

Feb. 24

$0.57

Nov. 25

$0.57

Eli Lilly & Co. (NYSE:LLY): LLY develops, manufactures and sells pharmaceutical products, for more than 135 years. It is among the 10 largest pharmaceutical companies in the world and holds a 7.5 percent market share in the US drug manufacturing industry. The company conducts research in more than 55 countries and operates R&D facilities in 8 countries.

For the second quarter of 2012, total revenue decreased by 10 percent to $5.601 billion compared to the same period in 2011. This revenue decline was driven by the loss of patent exclusivity for Zyprexa. Nevertheless, it was partially offset by volume gains for other products. The market cap of LLY is $58.72 billion. Its P/E ratio is 14.02, while forward P/E is 13.39. The company had an EPS growth rate of 9.77 percent over the past five years. Next year's projected EPS stand at 11.50 percent. With a net profit margin of 17.22 percent, the company's profitability prospects are relatively high. ROE and ROA figures are promising, and account for 28.19 percent and 12.48 percent, respectively.

As of October 12, 2012 the stock traded at $51 with year-to-date stock returns at 22 percent. LLY has a dividend yield of 3.87 percent and a payout ratio of 56.38 percent.

  • EPS Growth Estimate: -7%
  • FED+ Fair Value Range: $29 - $42

Recent dividend history is as follows:

Aug. 13

$0.49

May 11

$0.49

Feb. 13

$0.49

Nov. 10

$0.49

Pfizer Inc. (NYSE:PFE): Pfizer is a pioneer research-based biopharmaceutical company. It provides a diverse portfolio of consumer healthcare and nutritional products, as well as human and animal medicines. PFE was founded in 1849 and is headquartered in New York. In addition, the company operates R&D facilities in the U.S. and the U.K. PFE holds a 9.6 percent market share of the US pharmaceutical industry.

For Q2 2012, PFE recorded total revenues of $15.1 billion and adjusted diluted EPS of $0.62. Reported earnings were unfavorably impacted by higher charges related to legal matters. However, the 9 percent decline in revenue compared with the year-ago quarter was partially counterbalanced by lower costs related initiatives.

PFE has a market capitalization of $187.63 billion. P/E ratio is 21.84, while forward P/E is 10.83. 2012 full-year EPS estimations indicate a positive change of 9.08 percent. Over the past five years, net sales grew by 6.87 percent. Gross profit margin stands at 80.49 percent. Currently, PFE is trading at $25.12 with one-year stock returns at 33.21 percent. Earnings yield stands at 5.29 percent. Dividend yield is 3.50 percent with a payout ratio of 72.03 percent.

  • EPS Growth Estimate: 3.80%
  • FED+ Fair Value Range: $20 - $30

Recent dividend history is as follows:

Aug. 1

$0.22

May 9

$0.22

Feb. 1

$0.22

Nov. 8

$0.20

Merck & Co. (NYSE:MRK): Merck delivers health solutions through various healthcare products including medicines, numerous biologic therapies, consumer care products, and animal health. The company was established in 1891 and is based in New Jersey. It holds a large share of the US drug manufacturing industry, which in 2011 accounted for 12.9 percent. Recently, Merck sold its 50 percent interest in the JNJ Merck Consumer Pharmaceuticals joint venture. In addition, Merck has joint ventures with AstraZeneca (NYSE:AZN) and Sanofi Pasteur S.A (NYSE:SNY).

In the latest financial statement, Merck reported an increase in worldwide sales by one percent to $12.3 billion, or five percent excluding foreign exchange. Overall, during Q2 2012 Merck's operational performance remained strong. In addition, the company is expecting 18 major filings over the next 18 months, including medicines for insomnia and osteoporosis. Q2 2012 non-GAAP EPS increased 11 percent over the prior year to $1.05. Merck expects full year 2012 non-GAAP EPS to be between $3.75 and $3.85.

MRK has a market capitalization of $138.42 billion. Price-to-earnings ratio is 20.75. Forward P/E is 12.25. Historical data on sales from the past five years show a positive trend of 16.24 percent. Gross profit margin is 76.28 percent. As of October 2012, MRK traded at $45.45 with one-year stock returns at 42.37 percent. Price-to-sales ratio is 2.85 and price-to-book value ratio is 2.39. The stock yields 3.61 percent with a payout ratio of 74.76 percent.

  • EPS Growth Estimate: 4.9%
  • FED+ Fair Value Range: $36 - $54

Recent dividend history is as follows:

Sept. 13

$0.42

June 13

$0.42

March 13

$0.42

Dec. 13

$0.42

Source: 5 Top Pharmaceuticals Paying Substantial Dividends