Personal Finance

2 High-Yield Dividend Stocks That Are Ridiculously Cheap

A roll of $100 bills next to a sign reading "DIVIDENDS"

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.

The pharma giants GlaxoSmithKline (NYSE: GSK) and Novartis (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.

A roll of $100 bills next to a sign reading "DIVIDENDS"

Image source: Getty Images.

Has GlaxoSmithKline done enough to blunt the impact of generic Advair?

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.

If a generic version doesn't materialize, for instance, Glaxo expects its core 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.

Nurse giving patient a vaccine

Image source: Getty Images.

The big-picture issue is that the earnings power of Glaxo's newer growth products -- like its HIV meds Tivicay 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 CEO Joe 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.

Novartis' newer medicines are picking up the slack.

Image Source: Getty Images.

In 2016, for instance, the psoriasis medicine Cosentyx, the oral multiple sclerosis therapy Gilenya, and the heart failure medication Entresto all exhibited exceptionally strong sales growth, helping to offset Gleevec'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.

10 stocks we like better than Novartis

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and Novartis wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017

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 .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Personal Finance Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More