If you’re looking for high-quality dividend stocks that pay a better-than-average yield, the pharmaceutical industry is definitely worth checking out. Because of the political turmoil surrounding drug prices, after all, numerous pharma stocks are presently trading at extremely attractive price-to-sales and price-to-earnings ratios.
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The pharma giants GlaxoSmithKline(NYSE: GSK) andNovartis (NYSE: NVS), for example, both offer yields exceeding 3.5% and rock-bottom valuations. Armed with these insights, let’s dig deeper to consider if these two high-yield dividend stocks are worth buying right now.
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Has GlaxoSmithKline done enough to blunt the impact of generic Advair?
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Glaxo’s dirt cheap price-to-sales ratio of 2.8 and dividend yield that currently hovers around 5% are arguably both great reasons to consider snapping up some shares right now. Big pharma stocks, after all, rarely sport valuation metrics that are this alluring and that offer yields nearly on par with a junk bond.
The flip side of the coin is that Glaxo is staring down the possible entry of a generic version of its blockbuster asthma medicine Advair in the U.S. later this year. As a result, the drugmaker’s guidance for the year is somewhat of a mess.
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If a generic version doesn’t materialize, for instance, Glaxo expects itscore earnings to rise by between 5% to 7% in 2017. In the event that a generic does hit the market sometime in the second half of the year, the drugmaker’s core earnings could flatline or perhaps dip by low single digits for the full year.
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The big-picture issue is that the earnings power of Glaxo’s newer growth products — like its HIV medsTivicay and Triumeq and meningitis vaccines Bexsero and Menveo — could really be put to the test in 2017.
Now, the one bit of good news is that the drugmaker does expect four major regulatory decisions in 2017, with the experimental shingles vaccine Shingrix headlining this year’s class of would-be new medical products. If approved, Shingrix’s peak sales are forecast to top $1.5 billion by 2022.
Summing up, Glaxo’s appeal may be somewhat overstated from a pure valuation metric standpoint because of the uncertainty surrounding Advair — and then again, it may not if a generic Advair fails to reach the market. Even so, the company’s decision to maintain its dividend at current levels — despite Advair’s sales possibly nosediving later this year — is a reassuring sign that management is indeed dedicated to rewarding its shareholders regardless of the circumstances.
Novartis: A company in transition
Novartis is currently in the process of pivoting toward its next generation of products in response to the introduction of generic versions of the top-selling leukemia drug Gleevec. As an added pressure, the Swiss drugmaker has also been experiencing a steady decline in its eye care unit Alcon over the last few years — prompting CEOJoe Jimenez to explore the possibility of an outright sale, or an IPO of the struggling business before year’s end.
Even with these significant headwinds, however, Novartis is still expected to deliver roughly flat to slightly negative growth this year, and return to modest single-digit top-line growth in 2018. The underlying reason is the drugmaker’s superb clinical pipeline that has successfully brought several new growth products online over the past couple of years.
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In 2016, for instance, thepsoriasis medicineCosentyx, the oral multiple sclerosis therapyGilenya, and theheart failure medication Entresto all exhibited exceptionally strong sales growth, helping to offsetGleevec’s loss of exclusivity and Alcon’s continued march southward.
Despite the proven strength of Novartis’ newer growth products and its robust clinical pipeline, the market doesn’t seem to be impressed. The drugmaker’s stock, after all, is trading at the cut-rate price-to-sales ratio of 3.6 at present, which is among the lowest among all major drug manufacturers.
Novartis’ bargain-basement valuation also stands in stark contrast to its healthy dividend program. Apart from the fact that the drugmaker’s yield is well above industry norms (3.65% at current levels), the company is also expected to raise its dividend for the 20th consecutive year in a row later this month.
So while Novartis definitely has its work cut out for it with the Gleevec and Alcon issues, the threat of either a drastic dividend reduction or major revenue drop-off are probably way overblown at this stage. As such, this pharma stock and its high-yield dividend do look like compelling bargains right now.
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George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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