With their strong free cash flows, large-cap pharmaceutical/biotech companies can be a good place to look for yield. So, as earnings season nears, Barron's looked for members of the group with yields above 2% and payout ratios below 60%.
David Risinger, who covers the sector for Morgan Stanley, expects the new federal tax code to help pharma/biotech outfits, particularly by letting them repatriate overseas cash after paying a one-time tax. The money could fortify dividends. And, as Risinger wrote in a recent note, "Each major pharma company could benefit from additional pipeline assets."
In a note last fall, Goldman Sachs listed the 20 companies with the most cash overseas as a percentage of their stock market value. Cisco Systems (CSCO) topped the list, which included many tech names, along with plenty of health-care companies, including Amgen (AMGN) and Johnson & Johnson (JNJ).
Among the six stocks that Barron's selected from the list, Pfizer (PFE) sports the highest yield at 3.7%. The stock's one-year return is a decent 13.3%. Risinger predicts that Pfizer, whose sales have come under pressure in recent years, will have "accelerating revenue growth early next decade, as patent-expiration pressures fade in 2020 and beyond."
AbbVie (ABBV) has returned about 60% over the past 12 months, lifted by its blockbuster drug Humira, which treats rheumatoid arthritis and other conditions. Analysts expect AbbVie to report that global Humira sales exceeded $18 billion in calendar 2017, 14% higher than in 2016.
The stock was helped by a settlement AbbVie reached last year with Amgen, which plans to launch a biosimilar to challenge Humira. But the "settlement suggests no U.S. biosimilar Humira launches until early 2023," notes Risinger, adding that AbbVie has a strong pipeline. However, Goldman Sachs estimated last fall that Amgen has about $36 billion overseas. AbbVie's stock was yielding 2.8% recently, just below Amgen's 2.9%.
Bristol-Myers Squibb (BMY) yields 2.6% and trades at a pricey 19.3 times the $3.23 a share that analysts expect it to earn this year. It has bet big on immunotherapy drugs for cancer, such as Opdivo, whose 2017 sales probably totaled about $4.8 billion, nearly 30% above 2016's.
The lowest yielder among our six stocks is J&J, at 2.3%. But, with a well-rounded portfolio of drugs such as Remicade, an inflammation treatment, it has grown its payout at about a 7% yearly clip; that's likely to continue.
Our final pick, Eli Lilly (LLY), yields 2.6% and has returned about 16% in the past year. It's considering divesting its animal health unit, whose global sales total about $3.2 billion, "but we don't expect the loss of the division to impact Lilly's [economic] moat," notes Morningstar analyst Damien Conover. Lilly's top sellers include Humalog, for spikes in blood sugar, and Alimta, a cancer drug.
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