Biopharma and Dividends
Biotechnology and Pharmaceutical stocks often grab headlines over spectacular clinical successes or failures that send the price soaring (in either direction!). Indeed, the sector is ripe with speculation trying to find the next multi-billion dollar drug. A consequence of this can be stocks exhibiting high volatility. Such volatility can be an affront to the typical dividend investor, who wants reliable dividend payments and not to see his portfolio value exhibiting 10% mood swings. Perhaps somewhat surprisingly, large-cap biotechs are a good source of investment for dividend investors as they tend to pay out dividends and can have high growth rates that lead to large dividend increases. Additionally, their large portfolio of drugs and drug candidates tends to smooth out the volatility one sees with smaller firms which have only a few drug candidates.
High-Yielding Biotech Analysis
A list of 11 high-yielding biotech stocks are displayed in the table below with dividend yields ranging from 2.8% for Amgen, (AMGN) up to 5.2% for AstraZeneca (AZN). The payout ratios and 3-year dividend growth rates are listed for an initial dividend analysis. As an aside, I found that the reported payout ratio can vary depending on the source of the financial data (a word of caution). In the table below the payout ratio is calculated as (current annualized dividend per share)/(current year EPS estimates). This is a critical metric for dividend investors as payout ratios approaching 100% (or most certainly over!) indicates the company can't sustain the current dividend level without significant growth.
The majority of the companies appear to have sustainable dividend payout ratios between 39% (NASDAQ:AMGN) and 74% (GlaxoSmithKline (GSK)). The lone standout is AZN's payout ratio of 110% which puts the 5.2% dividend yield in jeopardy. A look at the 3-year dividend growth rates presents further bad news for AZN's dividend prospects as the company has needed to cut the dividend before. Three other companies also have a history of negative dividend growth rates: Novartis (NVS) (-0.5%), GSK (-5%), and Sanofi (SNY) (-5%). On the positive side, AbbVie (ABBV), AMGN and Gilead (GILD) all show sustainable payout ratios and double-digit dividend-growth rates. The rest of the companies (Bristol-Myers Squibb (BMY), Johnson & Johnson (NYSE:JNJ), Merck (NYSE:MRK), and Pfizer (PFE)) display sustainable payout ratios and a history of single-digit yearly dividend growth.
|Symbol||Dividend Yield|| |
|Dividend Growth Rate (3-yr avg)|
Of course being able to not only sustain, but grow a dividend is reliant on positive growth prospects for a company. An initial analysis of the relative valuation of this group of stocks reveals an average P/E ratio of 14.2. There are four stocks valued at least 10% less than their peers (highlighted in green below: ABBV, GILD, PFE, and SNY). AZN has the highest P/E which is a consequence of the expected earnings decrease of -21% this year. ABBV displays the best growth prospects of all the stocks, both near-term (39%) and long-term (17%). BMY is also expected to have double-digit growth going forward. Clearly, GILD stands out in the opposite respect with negative earnings growth expected both near and long term. The rest of field has long-term growth expectations in the single-digits.
|Symbol||P/E (projected 2018)|| |
EPS growth (projected 2018)
|Fwd EPS growth (3 - 5 years)|
Sorting the Best from the Rest
So which biotech stocks present the best dividend-investing opportunities? First, we'll start by removing AZN from contention due to its high payout ratio, negative dividend growth history, and high current valuation relative to the peer group. We'll also remove GILD because of the poor growth prospects in both the near-term and long-term. Next, we will take out GSK, SNY, and NVS due to negative dividend growth over the past three years. This lack of commitment to at least maintaining a consistent dividend is enough to scare off any dividend investor. I would have been willing to reconsider one of these stocks if they were expecting strong double-digit growth, but that isn't the case here. We will remove two more stocks which are on the borderline, MRK and BMY. MRK has a lackluster history of dividend growth of around 2% per year. This has been consistent every year for the past 5 years. At a yield of only 3.2% investors can do better elsewhere. The same story can be said for BMY, which has been a consistent dividend raiser, but at a meager growth of only 2.7% per year.
That leaves ABBV, AMGN, JNJ, and PFE.
My top pick out of these four stocks is ABBV. I go into much more detail on the investment case for AbbVie, including a concise overview of the company's drug pipeline prospects for the next 5 years in my recent article. ABBV has demonstrated strong growth in both earnings and dividend (50% increase in the past year to go along with the 17% 3-year annualized growth rate) which has translated into strong stock price appreciation. My analysis of their current and pipeline drug candidates leads me to be the conclusion that this is the most likely scenario going forward over the next several years.
I also like Amgen with its low payout ratio of 39% and a huge 24% annualized dividend growth rate (17% in the past year). Analysts are expecting more moderate single-digit growth rates than ABBV which would makes it a bit less attractive than that stock.
Pfizer has been a solid stock for dividend investors, giving them a 7% growth on their dividend return. It's my opinion as well that the stock is likely a bit undervalued with a P/E of 12.3 and has good growth prospects. All this combined with a solid 3.8% dividend yield makes me recommend the stock.
The final stock is JNJ, the dividend aristocrat that has raised its dividend every year since the dinosaurs went extinct. You know what you're going to get with this stock. For me, I would leave it out of a dividend portfolio, but I would understand the attractiveness for the more conservative investor who wants stability. It has a current yield under 3% with a historical dividend growth rate of 6%. It appears slightly overvalued to peers and has only single-digit growth rates expected. I don't see much to motivate me to include it in a portfolio. Better off looking elsewhere.
A quick backtest of a portfolio of my three picks ABBV, AMGN, and PFE over the past 5 years showed solid outperformance over investing in either the dividend aristocrats ETF NOBL or the biotech ETF IBB. More importantly, going forward these three stocks should be able to continue their outperformance.
|Portfolio||Value of $10,000 after 5 years||CAGR||Std. Dev.|
|ABBV, AMGN, PFE||$17,877||14.06%||17.92%|
Disclosure: I am/we are long ABBV. 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.