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Pharmaceutical Stocks Are All-of-a-Sudden Hot Again: Read About Drugs and Dividends
10/18/2012 11:01:00 AM
If you're considering investing in some pharmaceutical companies for the safety of their outsized dividends, you might want to get going on that. Others already have. Suddenly, several big pharma stocks are a lot more expensive than they were just weeks ago.
Shares of Merck ( MRK ), Pfizer ( PFE ), Eli Lilly & Co. ( LLY ) and Abbott Laboratories ( ABT ) have been trading at 52-week highs lately, with particularly strong gains in the past five months, as seen in a stock chart .
Dividends remain the key reason for drug company popularity on Wall Street, especially as more investors worry about a slumping market generally.
Pharma dividend yields , even with the price increases, are 3% or higher in most cases. Merck and Lilly carry dividend yields above 3.5% now.
Despite their big yields, none of these companies pay big portions of their income or cash on dividends. Look at the payout ratios (based on income) of a few pharmas companies compared to AT&T ( T ), another big, popular dividend stock. Or the cash dividend payout ratio against a popular utility dividend. Lower ratios suggest a higher likelihood of dividend hikes in the future.
But really, it's the drug news that's driven pharma PE ratios toward the 20s after years at lower valuations. Merck's new diabetes treatment Januvia is expected to generate more revenue - some $9.7 billion - over the next seven years than any other new drug, according to a recent study .
Reports from trials of Lilly's new Alzheimer's drug, Solanezumab, are generally good. Novartis ' ( NVS ) newer drugs Gilenya for multiple sclerosis and Afintor for breast cancer are selling well, as are its generic drugs.
It's all good news for shares that have been depressed for years now over worries that drug patent expirations would tank sales growth in coming years.
Of course, there's always a cautionary tale to be told whenever investing is involved, and this sector's is Bristol-Meyers Squibb ( BMY ). Turns out its new drugs that were so promising last year may never pay out big. It has dropped a hepatitis C treatment because of safety concerns, and competition is heating up for its new blood thinner even before it launches. Analysts are not optimistic that this picture will improve soon.
Dee Gill is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.