Why Wouldn’t You Buy These Pharmaceutical Stocks?

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

Investors are always trying to find the right balance between risk andreward. I believe the following three pharmaceutical stocks below offer a nice balance: They are expected to show some nice growth, while also paying a healthy dividend that exceeds most other investment options.

Is Pfizer (NYSE: PFE) right for you?            

Dow component and pharmaceutical giant Pfizer is surely a juggernaut, with trailing-12-month revenue near $60 billion, and a market capitalization at approximately $200 billion. The stock has done well the past year up approximately 20% and sitting right near its $27.84 52-week high. This leads us to naturally ask is it still okay to buy Pfizer at these levels?

In one word: yes. The company has blown past consensus analysts’ estimates in three of the last four quarters. It still looks relatively cheap at a 14 times trailing and 11 times forward P/E. This past year, Pfizer generated more than $18 billion in free cash flow, which allowed the company to raise its tasty 3.5% dividend yield yet again this past quarter. I think with the continued aging of the baby boomers creating consistent demand for the foreseeable future, a very strong balance sheet, and consistently growing and sizeable dividend, Pfizer is still a buy.

Is Amgen (NASDAQ: AMGN) a buy at these levels?

It is no secret that Amgen is a world-class firm with a number of lucrative products, which have led the company to $17 billion in annual revenue and a market capitalization near $70 billion. The stock has skyrocketed nearly 40% the past 12 months, though, leaving investors wondering whether it's still worth owning.

I believe it is, for a number of reasons. First, the company has operationally been fantastic, exceeding consensus estimates in each of the last four quarters. Second, analysts are expecting accelerating growth, from the 8% per annum it was growing the past five years to nearly 10% over the next five years. Third, the company trades at a historically cheap 16 times trailing and 11 times forward P/E.  Lastly, the company pays a consistently growing 2.2% dividend yield.  I think Amgen provides a great balance between growth and value , and is a solid buy for the long-term investor.

Why not look at Merck (NYSE: MRK) as a long-term investment?

Merck, like Pfizer listed above, is also a Dow component. It's easy to see why, since the company churns out over $47 billion in revenue and has a market capitalization at approximately $130 billion. This drugmaker has a diversified set of products and sturdy performance, but its stock has been lackluster, with little movement in the past 12 months. Is now the time for opportunistic investors to buy?

I believe it is, when we see that Merck has smashed consensus estimates in each of the last four quarters. Looking deeper, we see the stock is a little pricey, near a 20 trailing P/E, but the forward P/E is far more reasonable at 11, and we’ve seen that analysts have been conservative.

Merck has very strong free cash flow, at approximately $10 billion annually, which has allowed management to raise the dividend yet again this past quarter to a very nice 4.0% yield now.  The company has shown that it is firing on all cylinders the past year and has a shareholder friendly management more than happy to return those profits back to shareholders. I think Merck makes for a nice long-term income investment holding.

The Foolish take:

Investors everywhere are scrambling to find a decent return on investment, as bank accounts, treasuries, and most other fixed investments yield next to nothing. The stable and consistently growing pharmaceutical industry seems to be worth a look as these companies mentioned above -- Pfizer, Amgen, and Merck -- offer both some nice growth and a great dividend as we wait for that growth to materialize.

Wiseinvestors 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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