The market has been on fire since the dark days of the financial
crisis. The S&P 500 has soared an astounding 85% since the lows
of March 2009. Market returns have been propelled by more cyclical
sectors like technology and consumer products, while the more
defensive sectors have badly lagged the market. In short, it's the
go-go stocks that have been the first to benefit in the post crisis
market, but things might be changing...
has gotten long in the tooth while at the same time uncertainty is
growing as the Middle East erupts in turmoil. Oil prices are
soaring near $100 a barrel from just $85 a month ago and may climb
still higher, threatening economic recovery.
It may be time for investors to look at defensive stocks that
can perform in anyeconomy . Health care, more specifically major
drug manufacturers, earn consistent income in any
and, best of all, pay fat dividends.
Health care stocks have their critics, however. Most large drug
companies are facing steep patent cliffs and an accompanying fall
in revenue in the years ahead. In addition, uncertainty regarding
health care legislation and possible higher costs going forward are
weighing on prospects. However, these problems are largely factored
into share prices already.
Three stocks in particular stand out as having strong business
prospects, cheap valuations and high dividends.
1. Bristol Myers Squibb (NYSE:
markets drugs worldwide and is one of the largest pharmaceutical
companies in the world. The company sells at a higher
) ratio (14) than most Big Pharma companies (the industry average
is 13), but still lower than the overall market (15.4). Bristol
also pays a solid 5.2%dividend yield , compared with 2.1% for the
overall market and 4.5% for the pharmaceutical industry.
Like most major drug companies, Bristol faces costly patent
expirations. Blockbuster drugs Plavix (cholesterol) and
Abilify (anti psychotic drug), which account for nearly half of net
sales, will lose patents in 2011 and 2012. Also, most of Bristol's
sales are generated in the United States, meaning the company will
be negatively affected by the new health-care reform bill, which
requires discounts on drugs for patients using Medicaid. However,
these problems are already reflected in the stock price and the
company has solid prospects going forward.
Bristol Meyers has sold off most of its noncore businesses and
is focusing exclusively on drugs. The company has cut $2.5 billion
in operation expenses in the past few years as well, and has more
than $5 billion in cash that it can use for acquisitions. It also
has a robust pipeline of cancer drugs with a strong track record of
FDA approval. The stock has an excellent chance to impress going
forward, and thedividend is well supported with a 61%
2. Eli Lilly and Co. (NYSE:
has been around since 1876. The company makes top drugs in a
variety of areas, including antidepressant drug Prozac and
neurological drug Zyprexa. Lilly is truly a global powerhouse, with
product sales in 143 countries.
Lilly faces steep patent expirations in the next two years on
drugsaccounting for about 40% of sales. But this problem seems well
reflected in the stock, which sells for about seven timesearnings ,
well below the market (15.4) and industry (13) averages.
Like Bristol, Lilly is ambitiously trying to fill the looming
patent hole. The company acquired biotech giant Imclone in 2008 and
has been investing heavily in its internal pipeline of new drugs.
Lilly has also built a
of $6 billion and is in a good position to make more acquisitions
. In the meantime, the drug giant pays a 5.7%
that's strongly supported by a 41% payout ratio.
3. Abbott Laboratories (NYSE:
is more diverse than Lilly and Bristol, with pharmaceuticals
generating less than 60% of revenue. The company has four main
product segments, including pharmaceuticals, medical devices,
diagnostics and nutritional products. In addition to prescription
drugs, notable products include coronary and carotid stents, as
well as baby formula.
The interesting thing about Abbott is that it doesn't have
nearly the patent expiration cliff that other large pharmaceutical
companies have, yet the stock price has been held down along with
all the others anyway. And Abbott has grown earnings by an average
of 13% in the past five years.
Abbott has a strong mix of pipeline and existing drugs,
including cardiovascular drug Trilipix, which has blockbuster
potential. Selling at just over 11 times earnings with a dividend
yield of 3.6%, Abbott fits the mold of a defensive and cheaply
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This is an excellent environment for defensive, cheaply valued
companies that pay strong dividends. Longer term, the dynamics for
health care companies are quite promising as the U.S. population
continues to age and emerging market populations get richer and
seek medical treatment. All three of these companies can be
purchased at current prices.
-- Tom Hutchinson
Disclosure: Neither Tom Hutchinson nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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