Is Big Pharma The Real Tech Story?

by: Dana Blankenhorn

Jim Cramer was on the television yesterday, pounding the table for the idea that investors are chasing the wrong kinds of technology.

Forget Microsoft (NASDAQ:MSFT), he said. Focus instead on stocks like Eli Lilly (NYSE:LLY) and Abbott Laboratories (NYSE:ABT). Forget smartphones, think pharma. And think big.

Lilly and Abbott have been on a run lately. Lilly has a new drug for Alzheimer's and its purchase of Imclone in 2008 has paid off big-time. Abbott has been getting good results on a hepatitus c drug and is in the process of splitting off its branded drugs business under the name Abbvie.

Both stocks have done very well over the last year, gaining an average of 37% in price. Pfizer (NYSE:PFE) and Merck (NYSE:MRK) have also done well in the last year, Merck best of all. To these gains you should also tack on fat dividends - Lilly is yielding 3.73% at current prices, Abbott 3.09%, Merck 3.61%.

Even the dogs in this field at least yield dividends. Glaxo Smith Kline (NYSE:GSK) is up just 6% over the last year (although its dividend yields a fat yield of 4.94%). Novartis (NYSE:NVS) is also up just 6.4% in a year, with a dividend yield of 3.98%. These are doggy gains, but the dividends will keep you warmer than any RIMM smartphone, and they even beat the yields at Microsoft.

Why aren't these stocks getting their due?

It might be because they can be tough to understand. The ups and downs of testing, and regulation, can make things look choppy. The risks inherent in drugs going off-patent, and not being replaced, are real. On the other hand everyone knows how smartphones are doing -- you can just go to the mall and check them out.

Still, at the present time there is a compelling case for the group, especially if you're an investor looking for yield. The hope is that these companies are large and diverse enough that one bad drug, or one failed study, won't upset the dividend applecart, that these are stocks that you can buy now and ignore.

But before you call your broker, this may be just a "now" story. Lilly fell hard in the great recession and has yet to make up that ground. The same is true for Merck and Pfizer. Most of the group (Abbott being the exception) has yet to reach the heights of 2007. If the economy falls you won't be immune, and the dividend rate won't be immune from cuts, either.

So with those risks understood, consider the reward, and see if a little diversification in your tech portfolio might be in order. Right now ABT looks like the best long-term play, but if you want security I'd go for MRK.

Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.