7 High-Dividend Stocks in Healthcare

Source: Flickr user Kat R. 

Dividend stocks tend to be the cornerstone of any well-rounded retirement portfolio. Dividends are a beacon for investors to hone in on that demonstrate the financial health of a company and the possible longevity of its business model. They also act as a downside hedge for investors and are a great way, in conjunction with reinvestment, to supercharge their retirement growth.

Healthcare dividends: few and far between
But, among the various sectors of the stock market that do offer a dividend, income-seeking investors are going to have the most difficult time finding a solid dividend in the healthcare sector. This probably shouldn't come as a huge surprise, since much of the healthcare sector requires substantial reinvestment back into drug and diagnostic pipelines. Additionally, a good chunk of biotechnology companies aren't making money, making the idea of a dividend just seem silly.

According to data from Finviz, of the 710 listed healthcare stocks, just 84 paid a dividend at some point over the past 12 months, 31 paid a dividend that matched the approximate average dividend yield of the S&P 500 (2%), and a mere seven could be quantified as "high-dividend stocks in healthcare" with a dividend yield north of 3.5%.

These seven high-dividend stocks in healthcare are:

Source: Finviz.

One thing that probably stands out among these high-dividend stocks in healthcare is that most of them are established pharmaceutical players. GlaxoSmithKline, AstraZeneca, and AbbVie are pharmaceutical giants (offered lumped into the "Big Pharma" category), while PDL BioPharma purchases drug royalties and has a pretty diverse portfolio of royalty assets.

Also, Meridian Biosciences has a well-established diagnostic product line, as does PetMed Express, a veterinary-based direct-to-consumer pharmaceuticals, food, and vitamin business. Theravance, a royalty company focused on developing COPD and asthma products in collaboration with GlaxoSmithKline, is the only anomaly in terms of established product portfolios.

Not all high-dividend stocks in healthcare are created equally
But, it's important for income investors to realize that a high dividend isn't the ultimate determinant of investing success. In fact, a high dividend might be unsustainable, and could be downright dangerous for investors if it gets cut or shelved altogether.

Take PDL BioPharma for example. PDL BioPharma earns huge margins and substantial profits on its assets since its management team's sole focus is to purchase royalty-based assets for a certain dollar figure and reap the rewards. In 2014, it brought in $581.2 million in revenue against general and administrative expenses of just $34.9 million. That works out to a gross margin well over 90%, and it's the primary source of PDL's impressive dividend.

Source: PDL BioPharma.

However, just because PDL has low costs in no way makes it a safe investment. PDL is wholly dependent on its royalty stream, and its management team has previously mentioned that if it's unable to replace its royalty revenue with new products in the future, it may be best to wind down its business. With its Queen patents expiring in Dec. 2014, and some lag time between its last royalty payments for these patents of around a year, PDL's revenue could fall by 60% or more in 2016. If anything, it seems probable that PDL BioPharma may need to reduce its dividend payout in the near future.  

The same might be said for royalty company Theravance, which I believe committed the ultimate no-no in 2014 when it borrowed $450 million at a whopping 9% interest through 2018 in order to assist in financing a $0.25/quarter dividend.

Expected to support Theravance's hefty payout are its co-developed LAMA/LABA COPD and asthma drug hopefuls Breo Ellipta, Anoro Ellipta, Incruse Ellipta, and Arnuity Ellipta. Unfortunately, the drug launch for Breo and Anoro has been less than stellar, whisking away hopes of quick profitability for Theravance. More worrisome is Theravance's remaining $725.6 million in debt and its looming debt payment in a few years. I have a suspicion that this dividend may not hold over the long run.

Source: GlaxoSmithKline, Facebook.

Even established Big Pharma stocks aren't immune from dividend challenges. GlaxoSmithKline's workhorse drug is long-term asthma and COPD therapy Advair/Seretide, which delivered $6.3 billion in sales last year, down 15% year over year. Advair actually lost its patent protection years ago, but generic therapies aren't set to hit the market until 2016. Once they do, though, GlaxoSmithKline could be facing a huge profit decline and may need to cut its dividend payout.

High-dividend stocks in healthcare you can trust
The good news is there are high-dividend healthcare stocks you can trust -- you just have to be picky with what you buy.

AbbVie, for instance, is doing a good job of shoring up its pipeline in lieu of an eventual patent loss for anti-inflammatory Humira, the current best-selling drug in the world, later this decade.

Topping the list of its recent moves is its $21 billion purchase of Pharmacyclics, the co-developer of Imbruvica, a blood cancer drug that's already been approved in three indications, including mantle cell lymphoma and chronic lymphocytic leukemia (the most common blood cancer in adults), and is being tested in countless additional trials for both blood-borne and solid tumors. Peak sales estimates for Imbruvica on Wall Street have regularly ranged between $5 billion and $9 billion, with AbbVie now getting its slice of this revenue along with Pharmacyclics' development partner Johnson & Johnson.

It still might be a little early to suggest AbbVie's high-yield dividend can hold up just fine, but it's certainly making good inroads toward ensuring its dividend remains superior to its many of its peers.

Source: Flickr user Lindsey Turner. 

Small-cap PetMed Express is another name I believe you can trust. Even though direct-to-consumer animal pharmaceutical sales haven't taken off as quickly as expected, the company's high single-digit profit margin, $52.7 million in cash and cash equivalents with no debt, and 74% payout ratio based on its projected 2015 EPS, give it some breathing room to maintain its payout. If anything, I'd cautiously speculate that PetMed Express' enterprise value of $278 million is cheap enough to potentially attract buyout interest down the road.

In the end, there are great dividend stocks to choose from in the healthcare sector, you just have to be willing to look beyond their yields to determine if the business model has the substance needed to maintain that payout (or grow it) over the long run.