Is Teva Pharmaceuticals An 'Investment Classic'?

| About: Teva Pharmaceutical (TEVA)
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By Jonathan Yates

In a recent Forbes column talking about investment classics - starting with books and ending with stocks, money manager Ken Fisher lauded Teva Pharmaceuticals (NYSE:TEVA) along with other promising stocks such as Mattel (NASDAQ:MAT) and Applied Materials (NASDAQ:AMAT).

Image courtesy יעקב

There is no denying the appeal of Israel-based Teva to emerging market growth, value and income investors.

According to Fisher, Teva is now "the biggest generic drug maker, spanning 60 nations with 17 R&D centers. With low cost and strong emerging markets presence, expect low double-digit sales growth. It's cheap at 14 times earnings with a 2.3% dividend yield."

Demographics are also on the side of Teva. As the consumer class in emerging markets expands, the demand for generic drugs will increase dramatically.

The dividend of Teva stock, now around 2.50%, should appeal to emerging market income investors given the average yield for a stock on the S&P 500 Index is around 2%. In addition, the payout ratio of Teva is only 31.61%.

Historically, the average payout ratio for a stock on the S&P 500 Index has been over 50%. Such a low payout ratio means there is plenty of cash-flow for Teva to raise its dividend or initiate a share buyback program.

This low payout ratio results in a very bullish retention ratio for Teva. A retention ratio is equal to one minus the payout ratio, and the retention ratio for Teva is 68.39%. The higher the retention ratio the better, according to a recent article in the American Association of Individual Investors Journal. A retention ratio of above 60% is very strong, allowing for ample cash to fund future growth, with the average historic retention ratio being under 50%.

Interview with Tony Martins, Vice President of Supply Chain at TEVA Pharmaceuticals

Of paramount importance is that Teva makes money, and the company enjoys a profit margin of 15.08%. Pfizer Inc. (NYSE:PFE) only has a profit margin of 12.54%. The profit margin of Teva is supported by a very healthy gross margin of just over 50%.

It's not just Ken Fisher who is bullish on Teva stock. Now trading around $38.90 a share, the mean analyst target price for Teva stock over the next year is $53.42, and the mean analyst rating for Teva is bullish at 1.90 (5 being the worst and 1 the best).