Because of that ability to generate cash flow, health care stocks are known for returning some of that capital to shareholders in the form of dividends. Some of the biggest drug makers in the market today are offering some impressive dividend yields to go along with their potential for growth.
Here are four great examples.
As mentioned above, Pfizer Inc. (NYSE:PFE) is facing some issues with its drug pipeline. Lipitor is now off patent and the company is still looking for the next big drug to replace its revenue stream. Pfizer Inc. (NYSE:PFE) recently delivered a disappointing first quarter, but if the company delivers on some of the late stage drugs it has in development, revenue could begin looking solid again sooner rather than later.
Pfizer is looking to gain footing in the diabetes market with the development of ertugliflozin and the company is poised to bring its anticlotting drug Eliquis to the market shortly. Plus, it remains to be seen how Pfizer Inc. (NYSE:PFE)’s decision to sell Viagra online will affect sales.
Pfizer Inc. (NYSE:PFE) is one of the biggest drug companies out there and its 32% operating margin is among the best in the industry. Buy and hold investors may experience some short-term bumps on the road but a 3.10% dividend yield is a nice consolation as they wait.
Emerging markets like China are proving to be a big boon for Merck & Co., Inc. (NYSE:MRK) as evidenced by the region’s 6% year over year growth. That growth is helping soften the blow of an overall 9% year over year revenue decline that’s been affecting the company’s bottom line.
While the company has experienced some recent setbacks — diabetes drug Januvia had lackluster sales while asthma drug Singulair saw its patent expire — there’s reason for optimism. The company has agreements in place with Pfizer Inc. (NYSE:PFE) for the development of another diabetes drug and with Bristol-Myers Squibb on a hepatitis C drug that could end up proving to be quite lucrative.
In the meantime, the company maintains a reasonable P/E ratio of 12 and a solid 3.80% dividend yield.
With pharmaceutical companies, you often hear the term “patent cliff” that refers to the lost revenue associated with drugs going off patent. Most companies face it to some degree, but Eli Lilly & Co. (NYSE:LLY) may face a steeper cliff than most.
The company will lose patents on two of its major drugs in 2013 — anti-depression drug Cymbalta and insulin drug Humalog. Those two drugs resulted in combined revenue of almost $7.5 billion last year.
On the flip side, the company maintains a relatively strong pipeline. It maintains several drugs in Stage III development including two new cancer drugs that have shown promise. The stock remains expensive by most measures (a P/E ratio of 20, for example) and analysts are forecasting little growth, so the success of some of the late stage drugs will help support a robust current dividend yield of 3.60%.
Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) is easily the cheapest stock of this bunch. Sporting a P/E ratio of just 7 and a price to book ratio of 1.44, Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) appears to be a solid value play. On the surface, its fundamentals would suggest that this is a good stock for buy and hold investors, but read a little deeper and things get a bit murkier.
Revenue dropped 4% overall from the same year ago period thanks in large part to a 27% decline in the United States generic drug line of business. The generic drug business has fallen out of favor lately and it’s unclear if the company will be able to make up for the revenue loss in other segments of the business like emerging markets or brand name drugs.
For those willing to ride out some of the short-term volatility, Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) looks like a compelling value opportunity. Any return potential is enhanced by its current 2.80% dividend yield although that yield ranks as the lowest among this group.
Conclusion
If you’re simply looking to add a solid dividend yield to your portfolio that’s supported by a healthy balance sheet, then big pharmaceutical companies like the ones listed above are good choices. Whether it’s patent expiration or domestic revenue growth, each of these companies are facing varying degrees of short-term uncertainty.
Long-term, these companies should be able to deliver on revenue and earnings while paying out a sizable dividend. Short-term investors will want to weigh the short-term risks of revenue uncertainty and drug trial success before committing.
The article 4 Big Drug Companies With Big Juicy Yields originally appeared on Fool.com and is written by David Dierking.
David Dierking has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. David 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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