Why You Should Buy This European Healthcare Company

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Investors who buy stock in the major pharmaceutical companies likely do so because of several factors, including steady growth, modest valuations, and high dividend yields. A healthcare stock that exhibits all three characteristics can be an investor’s best friend, which is why some of the best performing stocks over the past several decades have come from the pharmaceutical sector.

While most investors probably know the major U.S. industry heavyweights, including Pfizer (NYSE: PFE) and Eli Lilly (NYSE: LLY), there’s a European pharmaceutical giant that has a much higher dividend yield than its competitors and may be the best pharmaceutical stock to buy today.

Profits from across the pond

GlaxoSmithKline (NYSE: GSK) carries a $122 billion market value and is one of the biggest pharmaceutical companies in the world.

The past few years have been difficult for many pharmaceuticals, as the industry has grappled with slow global economic growth and patent expirations. Those problems are only exacerbated for companies operating in Europe, where the economic conditions remain shaky at best.

That’s why Glaxo’s most recent annual results, while unimpressive on the surface, show the true resilience of the company. Glaxo’s business, which is split into Pharmaceuticals, Vaccines, and Consumer Health Care segments, cumulatively saw revenue dip by 1% in the most recent fiscal year.

While that doesn’t sound very good, it compares very favorably to how Pfizer and Eli Lilly have performed. Pfizer is facing a steep patent cliff as it loses protection on cholesterol drug Lipitor, its best-selling product ever. This is why the company saw full-year sales drop 10%.

Going forward, the picture remains murky at best for Pfizer. Lipitor accounted for nearly $10 billion in sales in 2011, and you can imagine how difficult it will be to replace those sales. Pfizer is spending heavily on research and development to try to replace that revenue, which will drag down profits in future quarters. That’s why Pfizer management is guiding investors to expect earnings of $1.50 per share to $1.65 per share in fiscal 2013, which would represent a 20% drop from the previous year’s profits.

Eli Lilly is facing its own patent expiration, a major factor behind the company’s 7% decline in full-year 2012 revenue. Eli Lilly management is confident in the company’s pipeline, but at the same time, Eli Lilly hasn’t raised its dividend since its February 2009 payout.

Eli Lilly’s 3.8% dividend beats the yield on the broader market, but dividend growth investors understand the merits of a company that can raise its dividend in good times and bad. Management hasn't indicated when it will next raise its payout, which means dividend growth investors are left out in the cold.

Glaxo: Growing both profits and dividends

That’s where Glaxo shines. Despite its struggles in recent years, Glaxo is still able to offer investors a meaningful pay bump on an annual basis. Glaxo's management remains steadfast in their commitment to increasing its payout. The company declared a fourth-quarter dividend higher than its quarterly payout last year. Glaxo's four quarterly dividends in 2012 amounted to 74 pence versus 70 pence in 2011, an increase of more than 5% year over year.

Not only does Glaxo increase its dividend regularly, but the company’s 4.5% current yield is significantly higher than the yield offered by both Pfizer and Eli Lilly.

Glaxo is up roughly 16% to start 2013, not even including its hefty dividend payments, so it’s understandable for value-conscious investors to wait for a better price before jumping in. I’ve had Glaxo on my watch list for some time, and it has come off its recent highs. Should the stock retrace back into the mid-forties, I’ll be pulling the trigger. For any investor interested in steady growth and an industry-leading dividend yield, Glaxo represents a great stock to buy.

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