Dividends make a huge impact on your overall investing returns. They can also provide solid income during your retirement years. Historically, big pharma stocks have been a great place for investors to turn to for high yields and reliable income.
But which big pharma stock is the best dividend stock of all? I looked at all of the largest drugmakers in the world, examining their dividend yields and their ability to keep the dividends flowing at current or higher levels. After reviewing all of them, my conclusion is that the best dividend stock in big pharma is (drum roll, please) AbbVie (NYSE:ABBV). Here's why AbbVie beat out all the others.
Look at the forest, not the trees
AbbVie doesn't have the highest dividend yield among big pharma stocks. That honor belongs to Teva Pharmaceutical Industries Ltd. (NYSE:TEVA), which currently has a yield of 6.94%. So why isn't Teva the best dividend stock in big pharma?
Teva reported a huge loss in its latest quarter. It also slashed its full-year 2017 outlook for revenue and earnings. The drugmaker faces significant headwinds with its U.S. generics business and declining sales for its top product, multiple sclerosis drug Copaxone. As a result, Teva stock has plunged more than 50% so far this year. While Teva's cash flow should keep the dividends coming for now, the dividend payments might not be enough to outweigh the stock's performance. Simply put, Teva is too risky right now, in my view.
AbbVie doesn't have the lowest payout ratio, either. Gilead Sciences (NASDAQ:GILD) takes the prize with a low payout ratio of only 21.5%. But Gilead's yield of 2.82% is well below AbbVie's, so the big biotech didn't fare well enough overall to be the best big pharma dividend stock. Gilead also faces some of its own challenges with declining revenue and earnings stemming from falling hepatitis C drug sales.
If we only looked at some of these individual categories, AbbVie wouldn't be the best dividend stock in big pharma. Remember the old saying, though: "Don't miss the forest for the trees." When we look at the big picture, AbbVie stands out as the best dividend stock among drugmakers.
With that in mind, let's dig into exactly why AbbVie ranks as the best big pharma dividend stock. Near the top of the list is its strong dividend yield of 3.5%. That's attractive to investors -- and it's the fourth best among all big pharma stocks.
More important, though, is AbbVie's ability to not only keep the dividends flowing but to increase them in the future. The company uses less than 60% of its earnings to fund the dividend program, indicating more flexibility for dividend hikes than any of the three drugmakers with higher yields.
AbbVie also appears to have the best prospects for earnings growth, which should allow the company to pay out higher dividends and drive the stock higher as well. The big biotech claims the top-selling drug in the world with Humira and one of the fastest-growing cancer drugs with Imbruvica. AbbVie's pipeline has also been rated as one of the three best pipelines in the biopharmaceutical industry.
And when it comes to track records for dividend increases, AbbVie stands head and shoulders above nearly every other big pharma with 45 years of consecutive dividend hikes (including the period before the company was spun off by Abbott Labs). Only Johnson & Johnson claims a longer streak, with 55 years of dividend increases.
The combination of one of the highest yields with what appears to be the greatest likelihood of further dividend increases makes AbbVie the clear winner, in my view, as the best big pharma dividend stock. However, there were a couple of runners-up that performed well in the evaluation.
Pfizer (NYSE:PFE) has a strong dividend yield of 3.82% -- even higher than AbbVie's. The big drugmaker seems to be in good position to increase its dividend in the future, with strong cash flow and an improving payout ratio. Pfizer's earnings outlook should improve as well in the next few years.
Sanofi (NASDAQ:SNY) also stood out among its peers. The French drugmaker claims a solid dividend yield of 3.35%. Sanofi currently uses less than 80% of its earnings to fund the dividend program. The company should be able to grow earnings over the next several years with strong growth for long-acting insulin product Toujeo and multiple sclerosis drugs Aubagio and Lemtrada.