Big pharmaceuticalstocks have fallen out of favor, especially
among investors seeking high-growthinvestments . Not only are these
firms releasing fewer new blockbuster drugs, but the sector as a
whole is seeing the headwinds from efforts to limit health care
Still, the pharma sector has some phenomenalinvestment
opportunities fordividend investors. Many of the industry giants --
Johnson & Johnson (NYSE: JNJ
Bristol Myers Squibb (
, for example -- are paying 3-4% dividend yields, with someoffering
yields as high as 9%.
Of course,yield alone doesn't make a good investment. It's also
important to consider the company's financial strength, and history
ofearnings and dividend growth.
Here is a look at the five top-yielding pharmaceutical companies
and my top picks for investors seeking reliable dividend
PDL BioPharma (Nasdaq: PDLI)
owns a patented process for creating difficult-to-produce
humanized antibodies, and licenses this technology to
biotech firms in exchange for royalties. Drug companies are
using this technology to develop new treatments for cancer,
autoimmune and infectious diseases.
Since 2004, PDL'srevenue from royalties has grown 20% a
year. PDL improvedearnings per share (
) 23% to $1.08 during the first nine months of 2012
compared with the year-ago period, and the consensusanalyst
estimate for annualEPS growth is 14% for the next five
years. PDL has paid an annual dividend of 60 cents a share
Payout is conservative at 43% and the dividend
yield is generous at almost 9%.
Psychemedics (Nasdaq: PMD)
is the world's largest provider of hair tests that detect
drug abuse. The company's clients are corporations and
government agencies, including more than 10% ofFortune
500 companies, the largest police forces in the United
States and nine Federal Reserve regional banks.
Last quarter, Psychemedics launched new tests for
detecting cocaine, opiates, PCP, methamphetamine and
marijuana from head and body hair. It also expanded its
lab capacity to include production on Saturdays.
Investments in new technology caused EPS to fall 11% to
51 cents in the first nine months of 2012 compared with a
year earlier, but bode well for future growth.Analysts
predict 20% EPS gains in 2013.
Psychemedics is debt-free and generates
industry-leading 22% operating margins. The company has
paid 65 dividends 65quarters in a row and hiked payments
25% last year to an annual rate of 60 cents. Payout is
rich at 93%, but is likely sustainable, given the
company's good growth prospects and zero debt.
is one of the world's largest pharmaceutical companies and
a top holding ofWarren Buffett . The company facespatent
expirations on several key products, including blockbuster
asthma drug Advair, but has beeninvesting in its pipeline,
which should support long-term growth prospects.
New drugs poised to launch include a weekly treatment
for diabetes and a daily bronchodilator for chronic
obstructive pulmonary disease. Last year's $3
billionacquisition of Human Genome Sciences also adds new
drug candidates for heart disease and diabetes to the
In the past decade, Glaxo's EPS growth has averaged 12%
a year, but analysts predict a 20% EPS decline this year
due to continuing weakness in Europe and growth slowing to
6% in each of the next five years.
Glaxo has a consistent record for dividend growth, which
includes a 6% increase last year. Payout is high at 78%
andshares yield about 5%. Debt is high at $28 billion and
250% ofequity , but Glaxo has $9.4 billion ofcash and
healthycash flow exceeding $7.4 billion a year to service
PetMed (Nasdaq: PETS)
distributes prescription and nonprescription medicines to
pet owners, mainly through online channels. This is a
pure play on the $50 billion spent on pet care every year
in the United States.
The company's top-line growth has slowed because of
competition from other online vendors such as
Amazon (Nasdaq: AMZN)
. But PetMed hopes to re-energize sales by expanding
product offerings and advertising, and shifting sales to
Cost-reduction efforts are beginning to pay off, too.
EPS improved 3% to 63 cents for the nine months ended
Dec. 31, 2012 from the year-ago period. Analysts expect
PetMed to deliver 5% growth in each of the next five
The company has no debt and generates $28.5 million of
annualized cash flow, which is more than enough to cover
$12 million in dividend payments. PetMed has raised its
dividend 50% in three years and shares yield almost 5%.
Shareholders were recently rewarded with a special $1
one-time dividend this past December.
was formed through last year's spin-off of Abbott's
pharmaceutical business into a newpublic company . Abbvie
owns the world's top-selling drug, Humira, which is used
to treat arthritis. The drug is expected to have
generated $10 billion in sales in 2012, which accounts
for roughly half of Abbvie's sales.
A big concern for Abbvie investors is the loss of
patent protection on Humira in 2016, but the company is
replenishing its pipeline through internal drug
development and licensing. For example, Abbvie is
considered second only to
Gilead Sciences (Nasdaq: GILD)
in the strength of its hepatitis C drug franchise.
Beginning in 2015, the company expects to launch four
major new drugs in rapid succession, each of which is
expected to produce at least $4 billion in peak
Although Abbvie hasn't reported financial results as a
stand-alone business yet, year-over-year income generated
by Abbott's pharmaceutical business rose 13% in the first
nine months of 2012 to $5.6 billion. Analysts target 15%
annual earnings growth for Abbvie during the next five
Abbvie has $7.2 billion of cash and annual cash flow
of $6 billion, which provides two-fold coverage of the
dividend. The company targets 50% payout and is committed
to dividend growth. At present, Abbvie pays a $1.60
annual dividend yielding about 4%.
Risks to Consider:
Abbvie and Glaxo rely on new drugs for future growth, but drug
development is inherently risky. Companies may spend hundreds of
millions of dollars on research and still fail to win FDA approval
for a new drug. Glaxo investors should also be aware ofcurrency
risk since dividend payments are made in British pounds. However,
unlike other foreign countries, the U.K. doesn't withholdtaxes on
dividends paid to U.S. residents.
Action to Take -->
My top pick overall is Abbvie. This company has a greatbalance
sheet and cash flow, a strong commitment to growing its dividend
and superior growth prospects. Glaxo and Psychemedics are a bit
riskier due to their high payout. PDL has a poor record for growing
its dividend and PetMed faces increasing challenges from
competitors, though thestock is a great play on the
ever-increasing pet-care industry in the United States.