Many stocks within the pharmaceutical industry have rallied significantly over the past few years and now sit at multi-year highs. It’s not hard to understand why: in today’s investing environment of historically low interest rates, bank products like certificates of deposit pay little to no interest. The 10-Year Treasury Bond still yields less than 2%, so high-quality equities like these stocks that provide yields in excess of 3% must seem extremely attractive to income investors hungry for yield.
However, investors who blindly chase high-performing stocks just for the sake of yield may be making a mistake. Unfortunately, large-cap big pharma stocks aren’t offering growth rates to justify their huge rallies, and as a result, investors would be wise to view the industry with caution.
Pricey valuations, little growth
It’s certainly true that the company offers investors reliable dividends. Bristol Myers Squibb Co. (NYSE:BMY) has paid dividends to shareholders for more than 300 consecutive quarters. However, the company isn’t able to offer investors meaningful dividend growth. Last year’s dividend increase amounted to just a 3% bump as compared to its prior dividend.
Meanwhile, Eli Lilly & Co. (NYSE:LLY) reported full-year 2012 revenues declined 7% year over year. These struggles are the main reason why the company hasn’t provided investors with a dividend increase in almost three years. Going forward, management hasn’t provided guidance as to when the company will resume increasing its payout.
Another pharmaceutical giant, Pfizer Inc. (NYSE:PFE), provided a 2012 report that contained some warning signals investors would be wise to heed going forward. Full-year 2012 revenues declined 10% versus the prior year, which management blamed largely on the loss of blockbuster cholesterol drug Lipitor.
Lipitor has represented Pfizer Inc. (NYSE:PFE)’s best-selling drug for years now, and the company will have to allocate significant resources if it wants to replace these lost sales. This will likely bring down the company’s bottom line results, and to illustrate, Pfizer Inc. (NYSE:PFE) is forecasting reported diluted earnings per share to be in a range of $1.50 to $1.65 for fiscal year 2013. This range represents a drop of as much as 23% from the company’s 2012 results.
The bottom line
It appears that, at current prices, the potential for outsized capital gains from these stocks has likely already been realized. Shares of large-cap pharmaceutical stocks such as these have been on an absolute tear over the past few years. To that end, Bristol Myers Squibb Co. (NYSE:BMY) is up 30% over the past year, and Eli Lilly & Co. (NYSE:LLY) has climbed 37% over the last 52 weeks. For its part, Pfizer Inc. (NYSE:PFE) is also up 30% over the past year. Consider, also, that these fantastic returns don’t even include the generous dividend yields that large-cap health care stocks are known for.
As of right now, I’d call each of these pharmaceutical giants holds. Investors should do reasonably well with these stocks, as they do provide solid income in a low-rate environment. Moreover, it’s rarely a wise idea to sell stocks just because they are fully valued or slightly overvalued, because as the saying goes, expensive stocks can easily get more expensive.
These are not bad companies by any means. Each of these stocks represents businesses that sell products that their customers need to have. By the same token, at these levels, you just can’t feel that any of these stocks represents screaming bargains. It’s entirely possible to find 3% yields (or higher) from stocks that offer better revenue and dividend growth, and as a result, investors would be wise to wait for a pullback before jumping in to these names.
The article This Sector Is No Bargain originally appeared on Fool.com and is written by Robert Ciura.
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