Certain large pharmaceutical companies have proven to be excellent high-yield dividend growth stocks. However, due to the cyclical nature of the business, high R&D costs, and various regulatory risks, pharma can also be a very challenging industry in which to invest.
Let’s take a look at Teva Pharmaceuticals (NYSE:TEVA), one of the highest-yielding big pharma stocks available today, to see whether its recent challenges (and plunging share price) make it a possible opportunity for our Conservative Retirees dividend portfolio or a classic value trap to be avoided.
Business Overview
Founded in 1901 in Petach Tivka, Israel, Teva Pharmaceuticals is the world’s largest maker of generic pharmaceuticals. In fact, it currently sells 1,800 drugs in over 80 countries around the world and plans to almost double that number in the coming year.
However, it also has a large patented drug business specializing in central nervous system, oncology, respiratory, and women’s health drugs. Finally, the company operates as a third party distributor for other pharmaceutical companies’ products.
| Business Segment | % Of Revenue | % Of Segment Profit |
| Specialty Drugs | 39% | 58% |
| Generic Drugs | 55% | 41% |
| Third Party Distribution | 6% | 1% |
| Total | 100% | 100% |
Source: Teva Pharmaceuticals 20-F
As you can see, the majority of Teva’s sales are derived from its generic business; however, the majority of profits are from higher margin, patented drug sales. The company is working to decrease its dependency on patented drugs with its $40.5 billion acquisition of Actavis Generics, a subsidiary of Allergan (AGN).
This acquisition is expected to boost Teva’s generic sales to nearly 60% of revenue, thanks to its planned launch of 1,500 generic drugs worldwide in 2017. Unfortunately, Teva’s timing was very poor because generic drug prices peaked at the time of its acquisition and have since declined across the entire industry.
