Time-Tested Pharmaceutical Stocks

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

This article looks at three dividend paying biotechnology and drug stocks - two with above 4% dividend yields, AstraZeneca (NYSE: AZN) and GlaxoSmithKline (NYSE: GSK), and one that apart from being a dividend stock also has a significant growth potential, Amgen (NASDAQ: AMGN).

Rationale for Dividend Investing in Today's Economy

Taxing bank deposits was indeed insanity, and one wonders why it was even considered. Fortunately, the Cyprus madness did not last long and ended with the Cyprus parliament rejecting the idea and Russians buying a bank, giving the markets a chance to rally back by the end of trading last Tuesday. The short-lived scare, however, did leave a scar, not only on nervous investors' minds but also on those who firmly believed that the current uptrend in the market is far from over.

The uncertainty must have made some investors run for cover and book profits. Not a bad idea, especially if you are sitting on a sizable profit, but if you have chosen your stocks carefully, you simply wait and do nothing. This is particularly true of fundamentally strong, dividend paying stocks like the ones I selected above.

AstraZeneca

AstraZeneca is a global pharmaceutical company engaged in discovery, development and commercialization of prescription medicines. It operates primarily in six areas - cardiovascular, gastrointestinal, infection, neuroscience, oncology, respiratory and inflammation. The company owns and operates a range of R&D, production and marketing facilities across the globe.

Astra Zeneca has been paying half-yearly dividends for more than ten years now and has been increasing the payout on a regular basis. In 2010, the company paid a dividend of $2.41 per share and raised it to $2.70 in 2011 and $2.85 per share in 2012. In 2013, it has already declared and paid the first distribution of $1.90 per share.

At current market price, the company's dividend yield calculates as 6.06%, which is much better than what you would get from Treasury Bonds or bank deposits.

<img alt="" src="http://static.cdn-seekingalpha.com/uploads/2013/3/4222561_13640171113858_rId5_thumb.jpg" />

Source: YCharts

The power of investing in fundamentally strong, high-dividend companies can be gauged by the fact that despite the turbulence of the last five years AstraZeneca stock returned 22.72%.

<img alt="" src="http://static.cdn-seekingalpha.com/uploads/2013/3/4222561_13640171113858_rId6_thumb.jpg" />

Source: Google Finance

Net income for the year ended Dec 30, 2011 was $10.02, an increase of more than 25% over the previous year. For the quarter ended December 2012, the company reported an EPS of $1.72, almost 14% more than the prior year. EPS for fiscal 2012 stood at $4.98.

However, some analysts have doubts about AstraZeneca's ability to sustain such a high dividend payout in future. The major reason for that is patent expiration (due in the next few years) of two of its best selling drugs, Nexium and Crestor, which accounted for more than a third of the company's revenues. This is without doubt a serious challenge to the company's revenues going forward.

However, the company has a long list of pipeline products in various stages of development. Some of them have been launched while others are expected to be filed for approval between now and 2017. The company also has a partnership with Amgen to sell five pipeline products.

The stock trades at a P/E of 9.7. Anything below 15 is considered to be a good valuation for an established dividend paying company. As far as appreciation is concerned, it may take time to regain its 52-week high, but you can rest assured that you will get an annual income of 6%, give or take a few basis points.

GlaxoSmithKline

Whereas AstraZeneca is focused on pharmaceutical discovery, development and marketing of pharmaceuticals, its rival company GlaxoSmithKline has a flourishing consumer healthcare segment along with pharmaceuticals and vaccines.

GlaxoSmithKline too has a history of uninterrupted dividends, with the most recent being $0.6895 paid on Feb 6, 2013.

<img alt="" src="http://static.cdn-seekingalpha.com/uploads/2013/3/4222561_13640171113858_rId8_thumb.jpg" />

Source: YCharts

At current market price the dividend yield calculates at 5.11%. The stock returned 9.31% over last five years.

The company derives revenues from a variety of healthcare areas. Its consumer healthcare division serves as a strong protection from loss in revenue that pharmaceutical companies have to experience due to patent expirations. Its popular consumer healthcare brands include Sensodyne, Panadol, Aquafresh, Lucozade, and Nicorette.

Amgen

Amgen is a biotechnology and drugs company with a primary focus on discovery, development, production and commercialization of medicines based on cellular and molecular biology. The company also markets recombinant protein therapeutics in supportive cancer care, inflammation and nephrology. In the last two years, the company has made a number of acquisitions including BioVex Group, Laboratorio Quimico Farmaceutico Bergamo Ltda (Bergamo) and KAI Pharmaceuticals.

I have chosen Amgen regardless of its low dividend yield (as compared to AstraZeneca and GlaxoSmithKline) for providing an income-cum-growth investment option to investors.

Amgen started paying regular dividends from 2011, consistently increasing payouts. It started with $0.28 per share in August 2011, and its latest payout was $0.47 in Feb 2013. The current dividend yield is 2%. In addition, the company's stock has returned 134.48% in the last five years.

There is a potential for increase in Amgen's dividend when viewed in light of the 18% increase in FY 2012 net income. Moreover, Amgen's payout ratio, the percentage of cash flows used for paying dividends, is much below the industry average of above 30%.

Conclusion

Big pharmaceuticals are low-risk investments. It is a defensive sector as the impact of economic conditions is much less pronounced than it is on cyclical sectors like retail, construction and real estate. Pharmaceuticals offer healthy payouts, consistent dividend growth, stock stability and protection from the vagaries of the stock market. Some of the stocks in the sector are actually ideal for retirees who do not want to risk their money on unproven businesses.

However, while health cannot be calculated in monetary terms, healthcare stocks can be and should be. Regardless of whether you are building an income based portfolio or planning your retirement, choose your stocks carefully.


Shas Dey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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