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2 attractive drugmakers with secure dividends

Necessity means dividends are very secure for drugmakers

Damien Conover, CFA 14 May, 2020 | 1:13AM
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Damien Conover: Today, we're talking about dividends and the large-cap pharmaceutical industry. And I think it's an important topic because we think the dividends look very secure. And the reason why we think they're secure, even in the backdrop of this coronavirus pandemic, is that drugs are something of a necessity.

So even as we social distance and potentially go into a recessionary environment here, even if it's just for a short period, people are still going to want to buy their drugs because they need them to manage their diseases.

Another really important reason why we think these dividends are secure is the dividend payout for these companies generally is around 50%. So that means the earnings that the pharmaceutical firms have--they tend to spend about 50% of them on the dividend. That gives these firms some room to navigate any sort of short falls in earnings due to any of the pandemic concerns that are going on right now.

And in aggregate, when we think about the dividend yield for this group, it's close to 3%. So in a world where yield is hard to find, the large-cap pharmaceutical stocks really do provide a nice sense of yield and support for that yield.

Beyond the dividend yield, we do see the group as undervalued, and a couple of the names that we like are Pfizer (PFE) and AbbVie (ABBV). Both of these stocks have strong dividends and a lot of support for those dividends. What we think the market is missing is the very strong pipelines of both of these companies.

These companies are focused in drugs for immunology disorders, which tend to have very strong pricing power that we think the market isn't fully appreciating. So in summary, when we look at the large-cap pharmaceutical industry, we see strong dividend yields that are very secure.

 

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About Author

Damien Conover, CFA

Damien Conover, CFA  Damien Conover, CFA, is director of healthcare equity research and equity strategy for Morningstar.

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