3 Top Dividend Stocks in Generic Drugs

There haven't been too many positive developments in prescription drug price trends. However, there is at least one:Generic drugs now make up nearly eight out of every 10 prescriptions. That's good news for payers and patients.

It's also good news for dividend-seeking investors. Why? Several makers of generic drugs pay out attractive dividends. Here's why Pfizer (NYSE: PFE), Novartis (NYSE: NVS), and Sanofi (NYSE: SNY) stand out as the top dividend stocks in generic drugs.

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Pfizer

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Pfizer became a major player in the generic-drug business thanks to its acquisition in 2015 of Hospira. That deal brought Hospira's generic sterile injectables business into Pfizer's fold. It also catapulted Pfizer into a leading position in the growing biosimilars market. The company also already marketed its own branded generic drugs.

Sterile injectable pharmaceuticals generated over $6 billion in revenue for Pfizer last year. Much of that was branded generic sterile injectables, although that total also included some proprietary specialty injectables. Pfizer's biosimilar products contributed another $319 million.

Investors have plenty to like about Pfizer's dividend. Its yield currently stands at 3.98%. Pfizer is spending a little more to fund its dividend program than it's making in profits right now. However, the dividend shouldn't be in jeopardy with the drugmaker's solid cash flow and earnings growth potential.

Novartis

Novartis' Sandoz division is another leader in generic drugs. Sandoz markets hundreds of generics across the world, with its leading products including generic versions of antibiotic Augmentin, osteoporosis drug Aclasta, and hypothyroidism treamentSynthroid.

In 2016, Novartis' retail generics business generated sales of $8.6 billion. However, generic drugs haven't been a real growth driver for the company. Retail generics sales slipped 1% last year. On the other hand, Novartis' biosimilars business is doing quite well, with the launches of its biosimilars to multiple sclerosis drug Copaxone and bone marrow stimulant Neupogen driving sales 31% higher in 2016 to just over $1 billion.

Novartis' dividend currently yields 3.35%. Like Pfizer, the company's dividend payout ratio is slightly above 100%, which isn't ideal. However, Novartis claims one of the strongest pipelines among big pharma companies and should be in good shape for future earnings growth.

Sanofi

Sanofi has the seventh-largest generics business in the world. Last year, the company's generics business segment made $1.8 billion. That figure reflected a 3.3% decline from 2015. However, on a constant currency basis, the segment achieved a slight year-over-year gain.

Generic drugs and biosimilars currently account for roughly 5% of Sanofi's total revenue. That percentage is likely to be lower in the near future, though. As part of its 2020 strategic road map, the French drugmaker decided that it would sell its European generics business. Sanofi remains committed to its generics businesses in other parts of the world and intends to especially focus on emerging markets.

Sanofi's dividend yield of 3.21% trails a little behind Novartis. However, unlike both Novartis and Pfizer, Sanofi is earning more than it spends on dividends, with a payout ratio of 86%.

Runners-up

There are two runners-up to the top three dividend stocks in the generic-drug industry that warrant attention as well. Teva Pharmaceutical (NYSE: TEVA) currently boasts a high dividend yield of 4.73%. So why didn't Teva land a spot in the top three? The Israel-based drugmaker is spending a whole lot more on funding its dividend than it's making on the bottom line. In addition, Teva faces some serious challenges, including a threat to its U.S. patent for its top-selling brand drug, Copaxone. There is ample reason to worry that Teva's dividend could be under pressure.

Things look much better for another runner-up. Amgen (NASDAQ: AMGN) doesn't make traditional generic drugs, but the big biotech hopes to make its mark in the biosimilar space. The company won approval for its biosimilar to the world's top-selling drug, Humira. However, Amgen is locked up in patent litigation with AbbVie that could prevent the launch of the biosimilar for a while. Amgen's dividend yield of 3.01% is solid, but it wasn't quite enough to knock Sanofi out of third place.

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Keith Speights owns shares of AbbVie and Pfizer. The Motley Fool recommends Teva Pharmaceutical Industries. The Motley Fool has a disclosure policy.