Battle of the Pharma Dividends: Bristol Myers Squibb Co. (BMY) vs. Eli Lilly & Co. (LLY)

Danger ahead
Are there dangers ahead for either company in paying dividends at current levels? There could be, particularly for Bristol. It can’t sustain dividend payments that are higher than earnings indefinitely. Either earnings must grow or dividends must be cut at some point.

The bad news for Bristol is that it faces loss of patent protection for several key drugs that make earnings growth quite challenging. The company already experienced a huge dent in sales last year with Plavix and Avapro going off patent in the U.S. Other blockbuster drugs losing patent protection within the next three years include Abilify, Baraclude, and Sustiva. These three drugs combined for $5.7 billion in sales during 2012.

There is some good news. Several drugs are showing strong sales growth and have several years of patent protection remaining, particularly Sprycel, Orencia, and Onglyza. Eliquis, the blood thinner developed with Pfizer Inc. (NYSE:PFE), was recently approved by the Food and Drug Administration and should also be a big winner.

Lilly isn’t immune from these same challenges. The company already experienced big sales declines due to loss of U.S. patent protection for Zyprexa. Two of its current top revenue-generating drugs, Cymbalta and Humalog, go off-patent this year. The drugs combined for $7.4 billion in sales for 2012. Evista, which garnered over $1 billion in sales last year, loses patent exclusivity in 2014.

One key area in Lilly’s favor is its animal health business, which grew revenue by 21% last year. Unlike Pfizer, which spun off its animal health unit, Lilly intends to hold on to this growing segment. The company also has several drugs in the pipeline that could be solid contributors, particularly diabetes drug dulaglutide and cancer drug ramucirumab.

The better pick
Actually, I’m skeptical about going with either stock as a dividend play. I would recommend Pfizer or Sanofi SA (ADR) (NYSE:SNY) ahead of Bristol-Myers Squibb or Lilly. Both pay a 3.5% forward yield with reasonable payout ratios. The two companies face some effects from the patent cliff but should be able to navigate those challenges relatively well. But we’re looking at a head-to-head battle here between Bristol and Lilly and need a winner.

I would give the nod to Lilly. My view is that Lilly will maintain dividends at current levels and will manage earnings relatively well despite loss of revenue as key drugs go off patent. It’s a tough call, though. I suspect picking which Olsen twin is my favorite would be an easier task.

The article Battle of the Pharma Dividends: Bristol vs. Lilly originally appeared on Fool.com and is written by Keith Speights.

Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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