Drugs And Pills On Top Of Hundred Dollar Bills

Image source: Getty Images.

Most investors love to buy stocks that pay dividends, and it's not hard to figure out why. In today's low-interest-rate environment, millions are forced to invest in dividend-paying stocks to generate any sort of yield on their nest egg. Naturally, that fact forces some investors to buy the highest-yielding dividend stocks they can find, which can be a risky strategy. After all, stocks don't offer the same downside protection as government bonds.

To mitigate that risk, some investors buy stocks only from recession-resistant sectors such as healthcare. They also limit their search only to companies that are a part of major indices such as the S&P 500.

With that in mind, I ran a screen of the highest-yielding healthcare stocks from the S&P 500. Here's a look at what that search produced.

Stock

Dividend Yield

AbbVie (NYSE:ABBV)

3.52%

Pfizer (NYSE:PFE)

3.30%

Merck (NYSE:MRK)

3.09%

Johnson & Johnson (NYSE:JNJ)

2.60%

Eli Lilly (NYSE:LLY)

2.57%

DATA SOURCE: FINVIZ.

With the S&P 500 offering up a dividend yield of only 2% at the moment, these five companies offer payouts that are much higher than that of the index. But are any of these stocks actually worth buying? Let's take a closer look at these companies' current growth prospects and valuations to determine if any of them are worth owning.

Growth prospects

All of the companies on this list are big, established pharma stocks that have been dishing out dividends for years. However, in the age of megablockbuster drugs that are losing their patent protection, each company faces its own set of growth challenges in the years ahead.

Lets look at that list of five companies again, but this time let's include their future estimated growth rates based on what analysts are currently projecting.

Here's what that list looks like now.

Stock

 EPS Growth Next Year 

 EPS Growth Next 5 Years

AbbVie 

17.9%

16.4%

Pfizer

7.9%

7.8%

Merck

1.1%

3.4%

Johnson & Johnson

6.1%

6.1%

Eli Lilly

11.9%

12.5%

DATA SOURCE: FINVIZ

The projected growth rates for these companies are all over the map, ranging from anemic to strong. Analysts are expecting double-digit growth for both AbbVie and Eli Lilly, with J&J and Pfizer in the upper-single-digit range.

Merck, on the other hand, isn't expected to do much. That's probably because its blockbuster drug Januvia is facing some real competition, which could weigh on its growth prospects from here. To me, that's a big enough reason to remove it from contention.

Valuation

Having a good idea of growth is one thing, but smart investing is all about getting good growth for a reasonable price. That's where valuation work comes in.

I'm a firm believer that you can't just look at any one metric to judge a company's value. For that reason, I like to look at a range of numbers when I'm trying to figure out how the market is pricing companies.

Here's a handful of valuation numbers on each of these companies that could help us refine the list further.

Stock

Trailing P/E

Forward P/E 

Trailing PEG

Forward PEG

Price / Book

AbbVie 

19

11

1.16

0.69

4.26

Pfizer

30

14

3.85

1.77

4.43

Johnson & Johnson

22

17

3.71

2.90

4.83

Eli Lilly

36

20

2.96

1.68

4.37

DATA SOURCE: FINVIZ and author's calcuation.

This list should help illustrate why I like to use a range of numbers to judge value. After all, if you only used trailing P/E you might immediately rule out Pfizer from contention. However, when you look at the forward P/E ratio, it actually looks quite cheap.

While none of these companies seem outrageously priced right now, Eli Lilly is trading at the highest premium to next year's earnings, so I'd suggest we remove it from out list. That's especially true when you consider that it currently offers up the lowest yield of the group and also sports one of the highest payout ratios

These three stocks look like buys

Running these five companies through this simple test leaves us AbbVie, Pfizer, and Johnson & Johnson. I'm happy to call each company a buy right now.

AbbVie offers investors the best combination of yield, growth, and value right now, but you could argue that it's being priced properly. That's because its autoimmune drug, Humira, is responsible for generating more than 60% of AbbVie's total revenue last year, and with its U.S. patent set to expire this this December, the door could be open to biosimilar competition. Management isn't worried, having stated that the drug is protected until at least 2022, which is why it's projecting double-digit earnings growth from now until 2020. If that proves to be accurate, then buying shares today could prove to be profit-friendly.

Screen Shot

Image source: Johnson & Johnson.

Pfizer's future is also looking quite bright. The the company's top line is poised for growth on the back of recent product launches such as the blood thinner Eliquis, the breast-cancer drug Ibrance, and the pneumococcal vaccine, Prevnar 13. It's also poised to be a major player in the biosimilar market thanks to its Hospira acquisition. Add in a strong pipeline and a cheap valuation, and this company looks like a strong buy. 

That brings us to Johnson & Johnson, the bluest blue chip of them all. J&J is so big and so well diversified that its business is basically immune to market conditions. Want proof? The company has increased its adjusted earnings for 32 consecutive years, and its dividend has been boosted for 54 years in a row. That's amazing, and when you consider that 70% of the company's sales come from businesses where it holds the No. 1 or No. 2 position and that it plows billions into R&D each year, I'd argue that the company stands a great chance of keeping those streaks alive for decades to come. 

Brian Feroldi has no position in any stocks mentioned. Like this article? Follow him on Twitter where he goes by the handle @Longtermmindset or connect with him on LinkedIn to see more articles like this.

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