With the average dividend-paying stock in the S&P 500 offering a yield of just 2.13%, hunting for satisfying payouts is a daunting task. Don't worry, though, there are still some juicy yields in Big Pharma.
Public outrage over escalating prices of older drugs has cast a dark cloud over the entire pharmaceutical landscape. For savvy investors, this is an opportunity to scoop up shares of highly innovative companies with dividends that are above average in more ways than one. Let's take a closer look to see why AbbVie (ABBV 0.76%), Novo Nordisk (NVO -0.86%), and Roche (RHHBY 1.45%) are the top dividend stocks in their industry right now.
1. AbbVie: An impressive track record
Since spinning off from Abbott to begin 2013, AbbVie has raised its quarterly dividend 42% to $0.57 per share. At the stock's recent price, that works out to a nice 3.6% yield, and another bump should be just around the corner. The company has boosted its distribution for 44 consecutive years, and it needs to raise it again the next time it declares a dividend to continue the streak.
The most recent increase raised the payout 11.8%, and AbbVie is generating enough cash to support another double-digit hike. The drugmaker used just 46.4% of free cash flow to make dividend payments over the past four quarters.
Investors will want to keep an eye on sales of AbbVie best-selling drug, Humira, in the quarters ahead. Its main U.S. patent expires near the end of the year, and the FDA recently approved Amjevita, Amgen's biosimilar version of Humira. AbbVie has about 70 additional patents it contends will keep Amjevita (and other biosimilars) from denting Humira sales for another six years.
Global Humira sales grew 16.2% in the first half over the previous year period, putting it on pace to reach $15.45 billion this year. AbbVie has been buying up promising drugs that could eventually offset impending Humira losses, depending on how long its additional patents hold up. For example, sales of blood cancer therapy Imbruvica are expected to grow from an annual run rate of $1.67 billion based on first-half sales to a peak of $7 billion. If it can keep the competition at bay long enough, AbbVie's dividend yield could continue climbing rapidly -- along with the stock price.
2. Novo Nordisk: Atop a growing epidemic
Worldwide, the number of diabetics grew more than fourfold between 1980 and 2014 to staggering 422 million. Novo Nordisk has been on top of the trend, and its 46% share of the global insulin market has made it one of the most profitable big pharmas.
Rapid growth, innovative diabetes care products, and precise capital allocation has allowed its dividend to grow at a dazzling pace. In its own currency, the Danish company's annual payout has increased at staggering 24.8% annual growth rate over the past decade.
Despite a 28% bump in 2015 over the previous year, the debt-free company has plenty of room to raise the payout further. Using about 60% to 70% of profits to pay dividends is generally considered sustainable, but Novo Nordisk needed just 46.6% of last year's profits to pay dividends to shareholders.
Novo Nordisk recently began paying bi-annual dividends, and it hasn't announced the size of this second payment for 2016 yet. Another 28% bump this year would provide a forward-looking yield of about 3.1%, and maintaining such a pace would lead to a double-digit dividend yield on your initial investment by 2021.
You can scoop up shares of this top dividend stock on the cheap thanks to fear of lower sales next year after tough negotiations with America's pharmacy benefit managers. I think the market has overreacted a bit. Although the U.S. accounts for about half of Novo Nordisk's total sales, roughly 30 million diabetic Americans represent a bite-sized portion of a giant worldwide epidemic. In the second quarter, the Chinese and Pacific regions added more combined sales to the company's top line, compared to the previous year period, than the big U.S. segment.
3. Roche: Breaking through
Roche offers a juicy dividend yield of about 3.4% at recent prices, and investors who appreciate stability will be happy to learn it has raised the annual payout, in Swiss francs, for 29 consecutive years. More importantly, a slew of breakthrough therapies could keep the streak going for another generation.
A few years ago, the FDA began granting "Breakthrough Therapy" designations to drug candidates with the potential to vastly improve upon available treatment options for serious conditions. Roche boasts an industry-leading 14 of these designations that allow increased Agency staff access to expedite the regulatory process.
One of these breakthrough drugs, Tecentriq, earned a speedy approval for bladder cancer earlier this year. Recently presented clinical trial results suggest it could become an important treatment option for a much larger group of lung cancer patients, which could help peak annual sales of Tecentriq top $3 billion.
Another of Roche's breakthrough therapies, Ocrevus, was the first to slow progression of an aggressive form of multiple sclerosis in a big clinical trial. A green light from the FDA that could lead to peak annual sales topping $5 billion is widely expected by the end of the year.
Last year, Roche used 58.7% of profits to make dividend payments, and expected single-digit profit growth this year should allow another modest dividend raise without sending its payout ratio into the danger zone. Further ahead, though, contributions from Tecentriq, Ocrevus, and other breakthrough drugs should allow it to reward patient investors with much bigger increases.