High dividend pharmaceutical stocks have been extremely popular in recent years. Dividend stocks are usually larger mature companies, and people do not expect a younger company’s growth from a dividend stock.
Interestingly for the pharma sector, however, bigger biotech companies rejuvenate themselves constantly by buying up or tying in with younger biotechs. Thus, while many of them provide good dividends, they also offer a lot of growth to investors. This is probably one reason why dividend paying biotech stocks are so popular, to say nothing of the fact that the sector has outperformed other sectors for quite some time now.
Stock performance however is no guarantee that companies will maintain or raise dividends. So, let’s look at three top dividend paying biopharmaceutical stocks and try to understand if the dividend paying capacity of these three maximum dividend yield stocks are sustainable.
The companies in question are AstraZeneca plc (ADR) (NYSE:AZN), GlaxoSmithKline plc (ADR) (NYSE:GSK) and Eli Lilly & Co. (NYSE:LLY).
AstraZeneca plc (ADR) (NYSE:AZN) not looking too good
At current market price of $48.98 (June 20, 2013), AstraZeneca plc (ADR) (NYSE:AZN) yields 7.50% if you go by Yahoo finance, the highest yield in the sector.
The problem is the company faces patent expirations and needs to reinvigorate its product pipeline. AstraZeneca plc (ADR) (NYSE:AZN), Britain’s second largest drug manufacturer, is buying Pearl Therapeutics for $1.15 billion.
Pearl Therapeutics is a specialist in respiratory drugs and if the deal goes through, it will secure AstraZeneca plc (ADR) (NYSE:AZN)’s position in the market for the new class of drugs for treating Chronic Obstructive Pulmonary Disease or COPD . Known as LABA/LAMA drugs, because they combine two existing therapies, these hold a lot of promise as they help avoid the use of steroids. This would serve as an insurance against the risk of losing Symbicort, its inhaled respiratory drug, to the new therapy.
The company also has another triple combination medicine for COPD in Phase II trials. However, it may lose the race for regulatory approval to Novartis AG (ADR) (NYSE:NVS), which is likely to get approval from the European regulator later this year for its LABA/LAMA candidate.
The Pearl deal follows an agreement made two weeks earlier, buying Omthera Pharmaceuticals to build AstraZeneca plc (ADR) (NYSE:AZN)’s cardiovascular portfolio. Omthera reported successful Phase III results of clinical trials of Epanova for treatment of patients with very high triglycerides and expects to get FDA approval this year.
These acquisitions are important for AstraZeneca as the company’s sales and profits are falling. Last year, the company lost patent for one of its bigger sellers, the anti-psychotic drug Seroquel. Next year two other bestsellers, Nexium and Cresta, go off patent. The company pipeline is not very impressive and without these acquisitions and favorable results from their pipeline products, AstraZeneca may find it difficult to maintain dividends, leave alone raise them, despite its 62% dividend payout ratio.
GlaxoSmithKline plc (ADR) (NYSE:GSK) is committed to dividend payout
The problem with GlaxoSmithKline plc (ADR) (NYSE:GSK)’s dividend paying capacity is that, with a 4.2% yield and $2.51 annual dividend, the company distributes 88% of its income.
At the same time, it has recently shown a commitment to raise dividends, which shows that the stock offers a reasonable upside for investors looking to include it in their income portfolio.
GlaxoSmithKline plc (ADR) (NYSE:GSK) will be losing exclusivity on a number of products next year. However, the company has a strong pipeline and at least 14 drugs entering Phase III clinical trial data soon. Already it awaits regulatory approval of two candidates for treatment of metastatic melanoma along with Anoro, a LAMA/LABA drug, along with Relva/Breo for COPD and asthma.
Eli Lilly & Co. (NYSE:LLY) is hurting from patent expiration
Eli Lilly & Co. (NYSE:LLY) has been paying dividends since 1987 and had been increasing them every year from 2000 to 2009. Since 2009, it has been paying $0.49 per share every quarter. However, the company’s dividend payout ratio of only 47% leaves room for growth.
On the other side, the company has suffered a lot due to patent expirations. It lost exclusivity on Zyprexa last year and Humalog (estimated global sales: $2.52 billion) in May this year. In December 2013, it loses patent on Cymbalta (estimated global sales in 2012: $4.9 billion). The company has adopted the policy of raising prices to meet challenges from patent expirations and also has twelve drug candidates in Phase III trials for a range of diseases such as diabetes, depression, Alzheimer’s and solid tumors.
Considering the revenue loss the company has taken and an uncertain future of pipeline products, it appears unlikely that the company will be able to raise its dividend in the near future.
Conclusion
All three of these companies are strong, with a proven track record of profitability and dividend payout. Investing in any of them is recommended at any time provided the price is correct.
However, for income investment, future dividend increases appear more likely in the case of GlaxoSmithKline plc (ADR) (NYSE:GSK). AstraZeneca and Eli Lilly & Co. (NYSE:LLY) have big challenges to face in the coming years and maintaining and/or raising dividends may not be that easy for them.
The article Will These Pharma Stocks Maintain Their Yields? originally appeared on Fool.com is written by Kanak Kanti.
Kanak Kanti De has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Kanak is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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