It can be tempting to buy stocks based solely on their dividend yield, but that can actually be a big mistake. However, that doesn't mean that all high-yield stocks should be avoided.
So which big dividend payers do we like right now? We asked a team of healthcare investors to weigh in and they picked AstraZeneca (NYSE: AZN), Pfizer (NYSE: PFE), and AbbVie (NYSE: ABBV).
A gamble that may be worth the risk
George Budwell (AstraZeneca): Because of the cost-intensive nature of developing drugs and subsequently bringing them to market in a highly competitive field, pharma stocks rarely offer dividends that can truly be considered "high yield." The British pharma giant AstraZeneca, however, is a clear exception to this trend, given its whopping annualized yield of 8.58%.
Astra's abnormal yield stems from its recent clinical setbacks in oncology that have cast serious doubt on management's ability to return the company to growth on a consistent basis -- along with the loss of exclusivity for a host of drugs, such as the former blockbuster cholesterol medicine Crestor. Put simply, investors have been steadily losing faith in this large-cap pharma, evinced by its nearly 12% decline over the past three years.
But Astra is far from a goner. Its lung cancer drug candidate Imfinzi may yet prove to be a valuable new addition to the field if it can prolong overall survival in its ongoing Mystic trial. And the company has built a strong stable of oncology medicines that include Tagrisso for mutated epidermal growth factor receptor cancers, as well as Lynparza for advanced ovarian cancer. Last but not least, Astra's diabetes franchise has also been growing at a healthy clip of late, boosted in part by the glycemic control medicine Farxiga.
All in all, Astra's prospects as either a growth or dividend stock are far from clear at this point. If Imfinzi rebounds next year, Astra's monstrous yield should be safe, but all bets are off if the company can't bring another franchise-level drug to market soon.
The deepest pipeline in Big Pharma
Sean Williams (Pfizer): When it comes to rock-steady high-yield pharmaceutical stocks, arguably none stands at the head of the class like Pfizer. Though its 3.6% yield isn't the highest among pharma stocks, its drug portfolio, pipeline, and growth prospects give it a clear advantage.
Pfizer's drug portfolio is diverse, with mature medicines delivering profits and cash flow right alongside high-growth divisions like internal medicine and oncology. Even though internal medicine remains Pfizer's bread-and-butter operating segment thanks to drugs like Lyrica and Eliquis, it's oncology that offers perhaps the most enticing growth opportunity for Pfizer.
Ibrance, a drug designed to treat advanced HER2-, ER+ breast cancer, has been a star for the company, with $1.53 billion in sales through the first half of 2017, a 63% increase from the prior-year period. If Ibrance can further expand its label, grow organically from increased demand (which seems likely given better diagnostic equipment and improved access to medical care), and pass along list-price hikes, it could easily grow beyond $5 billion in peak annual sales.
Another wildcard for Pfizer is going to be cancer immunotherapy Bavencio, which was licensed from Merck KGaA. Cancer immunotherapies are proving to be a foundational treatment for cancer patients with advanced disease, meaning Bavencio could have a shot at $1 billion or more in annual sales depending on how successfully its label is expanded into new cancer types.
In terms of Pfizer's pipeline, the company announced on Aug. 1, 2017, that it had 99 products at the clinical or registration stage, an increase of three from its May 2, 2017, update. Almost a third (32) of these projects are in pivotal late-stage trials, while another dozen have been filed for approval with the Food and Drug Administration. That's a lot of chances to hit a home run.
Having generated $13.2 billion or higher in free cash flow in each of the past five years, there's little concern about Pfizer or the health of its dividend. Income investors wanting a rock-solid high-yield dividend stock should be giving Pfizer a good look.
A monster drug that keeps on delivering
Brian Feroldi (AbbVie): AbbVie has slammed past the market averages since the company was spun off from its former parent Abbott Laboratories back in 2013. Investors can trace the company's tremendous success in a single word: Humira.
Humira is AbbVie's top-selling product that has become the go-to choice for treating a wide range of disease states (rheumatoid arthritis, psoriatic arthritis, Crohn's disease, ulcerative colitis, and more). When combined, Humira sales grew by 14% last quarter and exceeded $4.7 billion. Not only is the double-digit growth rate impressive, but this figure makes Humira the best-selling drug in the world.
Humira's massive profitability provides AbbVie with a tremendous amount of cash flow that it generously uses to reward investors. While the company's preferred capital return method is dividend increases (see below), management also makes occasional acquisitions as well to build out its pipeline.
The only downside to having a massive winner like Humira in its portfolio is that competitors are chomping at the bit to get a piece of the action. That's why companies like Amgen and Coherus BioSciences are racing to bring their own biosimilar versions of Humira to market. If they succeed and Humira's sales tumble, then it is possible that the company's generous dividend payment could be in trouble.
While this is a risk for investors to watch, AbbVie believes that the drug's patents will keep profits flowing into the early 2020s. By then, I think the odds are good that a few of the company's pipeline products will be on the market and ready to pick up the slack.
Looking ahead, analysts are projecting that AbbVie's profits will grow by nearly 14% annually over the next five years. Despite the growth potential, shares are only trading at around 13 times next year's earnings estimates and offer up a dividend yield of 3% (that only consumes about 60% of profits). When combined, I think that makes AbbVie a growth stock that income-seeking investors should get to know.
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Brian Feroldi has no position in any of the stocks mentioned. George Budwell owns shares of Pfizer. Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.