Drugs And Dividends Go Together

Includes: AZN, GSK, LLY, MRK, NVS
by: Activist Stocks

Big pharma is a very profitable sector to be in. The companies produce drugs that salesmen convince doctors to prescribe to their patients and big pharma pays dividends to its shareholders. The economies of scale allow the big companies to develop new drugs or to just buy a young biotech for their upcoming product line. The following companies follow that path and stick to the same business model. Once they have a blockbuster drug, they squeeze all that they can out of it until the patents expire and the next new "blockbuster" drug is released.

AstraZeneca PLC (NYSE:AZN) - Dividend Yield: 7.70%

AstraZeneca's principal products include Atacand for hypertension and heart failure, Crestor for managing cholesterol levels, Nexium for acid reflux, and Seroquel XR for schizophrenia, bipolar disorder, and major depressive disorders.

The company currently has 84 pipeline projects which includes 71 in various phases of clinical development. From a valuation perspective, the company has an excellent balance sheet. AstraZeneca has a forward P/E of only 9.45 and a PEG ratio of -0.88. The company has an operating margin of 35.58%, a return on equity of 26.68%, and total cash of $8.52 billion.

What's more is the stock has a low beta of 0.50. The annual dividend is $3.80 per share for a yield of 7.70%, which equates to a 58% payout ratio.

Merck & Co., Inc. (NYSE:MRK) - Dividend Yield: 3.90%

Merck is a global healthcare company that produces prescription medications, vaccines, biologic therapies, animal health and consumer care products. The company markets either directly or through joint ventures. This will be a make or break year for Merck. This year the company loses patent protection for mega blockbuster Singulair globally.

Their type-2 diabetes drug Januvia/Janumet should take over the top spot from Singulair, but it won't be enough to offset the sales decline from Singulair. Merck's Gardasil is the leading HPV vaccine on the market and has more room for growth. Merck also has a tablet submitted to the FDA that dissolves under the tongue to eliminate allergy symptoms. Patients using this tablet will no longer have to get monthly allergy shots.

Merck also has a strong balance sheet like AstraZeneca (see why they should merege). The forward P/E of 11.63 is quite attractive. The company has over $16 billion in cash and just over $20 billion in debt. The annual dividend is $1.72, a recent $0.02 increase, for a yield of 3.90%. Merck's payout ratio of 85% leaves little room for dividend growth.

As far as hedge fund interest, Merck is now one of Billionaire Stanley Druckenmiller's largest holdings with 2.4 million shares. Cliff Asness of AQR Capital Management owns 3.1 million shares.

Novartis AG (NYSE:NVS) - Dividend Yield: 3.60%

Novartis produces pharmaceuticals for cardiovascular, respiratory and infectious diseases, oncology, neuroscience, transplantation, dermatology, gastrointestinal and urinary conditions, and arthritis, vaccines and diagnostics, vision, and animal health products. The company is headquartered in Basel, Switzerland.

Currently the main issue for Novartis is the company's legal battle in India over patent protection for its anti-cancer drug Glivec. Investors are awaiting the Supreme Court's decision any day now. Big pharma has had setbacks in India over patent protection where they failed to secure patent protection for certain drugs in that country.

From a valuation standpoint the company has a forward P/E of 12.81. The company has almost $8 billion in cash to almost $20 billion in debt. The annual dividend is $2.53 for a yield of 3.60%. The company's payout ratio of 64% allows the company to pay a dividend and pay down debt and invest in R&D at the same time.

Eli Lilly & Company (NYSE:LLY) - Dividend Yield: 3.50%

Eli Lilly discovers, develops, manufactures, and sells pharmaceutical products for humans and animals. Eli Lilly's products include neuroscience products, endocrine products, anti-infective, cardiovascular agents, oncology products, and animal health products.

Eli Lilly like other big pharma companies is dealing with several blockbuster drugs about to go off patent. However, the company does have several drugs in Phase III that have blockbuster potential. The most promising of these is a drug to treat Type-2 diabetes, which accounts for about 90% of all diabetes cases worldwide.

From a valuation perspective, Lilly has a higher forward P/E than the others at 20.28. The company has an equal cash to debt ratio, so it's not leveraged. The stock is up over 41% in the last year, so investors already owning the stock are quite happy. The current dividend is $1.96 for a yield of 3.50%. The payout ratio is only 54% and with their strong balance sheet, Lilly does have room to boost payout. What's more is that insiders have been activley dumping the stock.

GlaxoSmithKline plc (NYSE:GSK) - Dividend Yield: 5.90%

GlaxoSmithKline is a global pharmaceutical company that develops, manufactures, and markets vaccines, prescription, and over-the-counter medicines, as well as health-related consumer products. GlaxoSmithKline provides products for infections, depression, skin conditions, asthma, heart and circulatory disease, and cancer. Its consumer healthcare brands include Sensodyne, Panadol, Aquafresh, Lucozade, and Nicorette.

GlaxoSmithKline has a more leveraged balance sheet than AstraZeneca. The company has over $29 billion in debt and just under $7 billion in cash. The company's forward P/E is higher as well at 13.44. The stock has an annual dividend that's quite impressive at $2.76 for a yield of 5.90%. The payout ratio of 84% makes it highly unlikely that the company can increase the dividend payout. Billionaire Ken Fisher likes the stock. It is his 29th largest holding (check out Simons dividend payers).

Bottom line

All 5 are low beta stocks with significant cash flow. The main concern for these big pharmaceutical stocks is patent expiration on some of their key drugs. Investors have to hope that the next drugs are blockbusters and make up for the revenue loss. From a dividend perspective, the dividends are here to stay as all have for the most part strong balance sheets. Some are stronger than others and investors have to consider that if they're looking at just the dividend.

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