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By Fani Kelesidou

Over the years, the drug manufacturing industry has rewarded its investors with substantial dividends. Most major pharmaceuticals have dividend yields in the range between 3.5% and 4.0%. This is more than twice the yield on the 10-year Treasury bonds and well above the yield on the S&P 500. I expect these companies to keep offering substantial dividends. Given the aging populations around the globe, spending on prescription medications is expected to grow rapidly over the next decade. Following a recent article on 5 pharmaceuticals headquartered in the U.S., I decided to extend the research by including 4 European companies.

Here, I review 4 pharmaceuticals, which meet the following criteria:

  • 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 the FED+ valuation technique. Data is derived from morningstar and finviz.

AstraZeneca Group Plc (AZN)

AstraZeneca Plc resulted from the merger between Astra of Sweden and Zeneca Group of the United Kingdom in 1999. It is headquartered in London, U.K. The company specializes in the development and commercialization of prescription medicines across several therapeutical classes.

AZN is trading with attractive valuation metrics and offers the highest yield compared to the other companies in this list. Overall, based on the current valuations, it seems that the stock is offering a value opportunity. Current P/E ratio of 7.54 is very close to the five year average P/E of 8. In addition, for the past three years, EPS grew by 20.2 percent. Nevertheless, analysts are concerned about AZN's future performance. The company is facing a decline in quarterly sales mainly due to expiration of certain patents and increased competition, especially from Pfizer (PFE). Thus, investor sentiment is not so positive for the short-term. However, I expect sales to recover by AZN's diversification into new markets and increased operations in the emerging economies.

The company has enough profit-generating capacity. Trailing return-on-equity ratio of 36.0 and net margin of 26.6 percent stand way higher than the industry's average of same variables. Also, long-term debt-to-equity ratio of 0.4 is much lower than the industry's median of 6.0. AZN is trading around $48 with a beta 0.65 and a dividend yield of 6.06 percent. Our fair value estimation ranges between $60 and $78.

GlaxoSmithKline (GSK)

With a market cap of $111.97 billion, U.K.-based GlaxoSmithKline ranks as one of the largest companies within the industry. GSK employs more than 97,000 people in over 100 countries. It is a leading producer of various medicines that treat major disease areas.

GSK is trading 13% over its 52-week low and has 14% upside potential based on the average analysts' mean target price of $51.50. Out of 18 analysts tracked by Morningstar, 10 indicate a "hold" rating, while 6 suggest a "buy" rating.

The company gained a stronger foothold in competition thanks to its recent acquisition of Human Genome Sciences and the release of a new drug. This new drug (Benlysta) is the first FDA approved treatment for lupus in almost 50 years.

Fundamentally, GSK has several positives. EPS this year grew by 223.8 percent. ROE stands at 66.22 percent. Moreover, gross profit margin reached 72.68 percent. The debt-to-equity ratio of 1.9 is a bit concerning, but still is much lower than the industry's median.

GSK is trading with a P/E ratio of 13.61. Over the past five years, the company has rewarded its shareholders with an average yield of 5.12 percent. Currently, GSK is a solid dividend payer with a yield of 5.04 percent. According to the Fed+ valuation technique, the estimated fair value of GSK is $48-$53.

Novartis AG (NVS)

Novartis focuses on the development and manufacture of health products. It operates through five segments, which include diagnostic and vaccines, generic and branded pharmaceuticals, as well as, eye care and consumer products. The company was created in 1996 through the merger of Ciba-Geigy and Sandoz.

NVS's competitive advantages make it an ideal candidate for initiating a long-term position. It holds a diversified operating portfolio and promotes a number of new industry-leading drugs. The company's short-term growth prospects are negatively impacted by certain manufacturing malfunctions and the patent loss on Diovan. EPS this year followed a negative trend of 11.28 percent. Also, the company experienced a 3.82 percent loss on quarterly sales. However, Novartis holds a solid strategic position within the industry that will speed its recovery. Over the past five years, EPS rose by 5.57 percent and sales grew by 11.08 percent.

Technically, NVS looks robust. It is on the comeback trail and is up more than 20 percent for the quarter. Currently, NVS is trading around $63 with relatively attractive valuations. It is trading 2.4 times book value and with a P/E ratio of 17.84. While the current P/E ratio is a little pricey, the forward P/E falls to 11.67. Within the last five years, quarterly dividends increased by more than 60 percent. The company's last dividend announcement indicated a yield of 3.93 percent. Based on EPS growth estimate of 6.2%, our fair value estimation range stands between $56 and $84.

Sanofi-Aventis (SNY)

Sanofi is a global and diversified healthcare leader. It develops and distributes therapeutic products including human vaccines and animal drugs. Sanofi aims at reinforcing its footprint in rare diseases. About 40 percent of the company's revenue is derived from emerging markets.

Sanofi's recent agreement to acquire Genfar- a generic market leader in Colombia- is going to enhance the company's position in Latin America. Another interesting factor in Sanofi's future sales prospects is the company's efforts on treating multiple sclerosis. Recently, the company's Genzyme division published data from clinical trials on two drugs, which appear to be an effective therapeutic solution to the disease.

Sanofi's valuation metrics and positive operational outlook make it an appealing investment. The company has a current P/E ratio of 14.14 and forward P/E of 10.97. SNY is trading 1.62 times book value and 2.53 times sales. Compared to its peers' valuations, SNY could offer a significant bargain. Moreover, the company has a gross profit margin of 68.11 percent and a debt-to-equity ratio of 0.18, indicating a solid financial position.

Currently, the stock is priced at around $44.50. Throughout the first 3 quarters of 2012, the stock has performed nicely by returning 20 percent. Sanofi yields 3.79 percent, a little bit lower than its 5-year average dividend yield of 4.41 percent. Our fair value estimations suggest a price range between $40.50 and $68.

Source: 4 European Pharmaceuticals Paying Substantial Dividends