How to Choose a Big Pharma Stock

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

While trying to create the perfectly diversified portfolio, any investor should allocate a portion of their investments to the healthcare field.  Of particular interest, especially for long-term investors, are the big pharmaceutical companies.  They tend to have strong growth rates, which not only leads to an increased share price over time, but a high dividend that increases as well. 

When trying to choose which particular company or companies to invest in, several criteria must be met.  First, the company needs to be very established and stable, so I’m going to limit the choices to those with market caps of $50 billion or more and over 20 years in business.  Then, the candidates must be compared to see who has the best track record of increasing dividend payouts and improving shareholder performance.  The best candidates that I found in no particular order are:

1.)    Pfizer (NYSE: PFE) Major drugs include Lipitor and the ever-famous Viagra.  Pfizer is an extremely large company, with a current market cap of $180.5 billion, and it trades at 19.31 times TTM earnings.  The company has rewarded investors well, with a 20-year average increase in share price of 7.5%, and an average dividend raise of 10.2% annually.

2.)    AstraZeneca (NYSE: AZN) Major products include Crestor, Nexium, and Symbicort, among others.  AstraZeneca has one of the highest yields in the sector, currently paying a dividend of 6.19%.  AstraZeneca has a current market cap of just over $57 billion, and trades at only 9.4 times earnings.  AstraZeneca has increased its share price by 8.2% on average over the past 20 years, and has raised its dividend by 9.7% on average.

3.)    Merck (NYSE: MRK) Merck is a major pharmaceutical player, in addition to a thriving vaccine business, and has OTC brands such as Claritin and Dr. Scholls foot products.  Merck’s top selling drugs include Singulair and Januvia.  The company currently has a market cap of $133.5 billion and trades at 20.2 times earnings.  Merck has increased its share price by an average of 3.9% per year, and has increased its dividend by 6.6% on average.

4.)    Johnson and Johnson (NYSE: JNJ) The largest and most diversified company on this list, they only derive about 37% of their sales from pharmaceuticals.  40% of Johnson and Johnson’s income is from their medical devices and diagnostic division, while 23% comes from their consumer brands such as Band-Aid, Tylenol, Immodium, Neutrogena, and their enormous line of baby products.  The company has a current market cap of just over $192 billion and trades at 23.11 times earnings.  Over the past two decades, Johnson and Johnson has increased its share price by 9.5% annually, the highest in this group.  It has also hiked its dividend by an astounding 13.1% annually.  This is surprising, considering they are traditionally thought of as one of the “boring” stocks; I’ll take a 13% raise any day!

5.)    Abbott Labs (NYSE: ABT) A diversified company deriving 58% of its income from pharmaceuticals, including its top seller, Humira.  Abbott has a market cap of $100.3 billion and trades at 15.69 times earnings.  Its 20-year average increase in share price is 8.6% and its payout increased on average by 10% annually.

These results were somewhat surprising for me, particularly when it comes to Johnson and Johnson. We tend to think of most of the big pharma companies in a very similar light, and if anything, consider Johnson and Johnson to be one of the more “stable and boring” of the companies.  However, its track record speaks for itself.  AstraZeneca has been the highest performing of these stocks, but there is recent speculation about whether or not they will be able to maintain their lucrative dividend.

To sum it up, a strong bullish case can be made for any of these companies.  At the end of the day, personal preference plays a big role in deciding between them.  I, however, am a strong believer in history repeating itself, and for that reason my favorite in the group is Johnson and Johnson.  None of these are “bad investments” by any definition of the world, and all deserve fair consideration for your portfolio.

KWMatt82 has no positions in the stocks mentioned above. The Motley Fool owns shares of AstraZeneca plc (ADR) and Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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