In the United States, monopolies technically aren't supposed to exist, thanks to the Sherman Antitrust Act of 1890. However, there are a handful of U.S.-based companies that do, in fact, own a disproportionate share of their respective markets and therefore sport unusually rich free cash flows. And fortunately, some of these titans of industry have also chosen to use their strong free cash flows to reward loyal shareholders with a top-notch dividend yield.
Armed with this insight, we asked three of our Motley Fool investors which high-yield stocks with virtual monopolies in their primary markets they think are worth buying right now. They recommended AbbVie (ABBV 0.07%), AB-InBev (BUD 0.71%), and Enterprise Products Partners, LP (EPD +0.73%). Read on to find out why.
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A dominant pharma
George Budwell (AbbVie): In a field where monopolies are nearly non-exist, pharma giant AbbVie has managed to gobble up more than a third of the massive biologic drug market with its anti-inflammatory megablockbuster Humira. In fact, Humira remains the world's best-selling drug -- despite a number of new competitors entering the market over the past couple of years.
Because of Humira's double-digit sales growth and overwhelmingly dominant share of the anti-inflammatory market, AbbVie has been able to regularly increase its dividend since being spun off from Abbott Laboratories in 2013. As a result, the company currently offers a healthy yield of 2.93% -- which may not sound like a particularly high yield, but it is above average for a large-cap pharma stock. Pharma companies, after all, tend to plow most of their profits back into their cost-intensive R&A and M&A activities that are necessary to stay one step ahead of any would-be competitors.
AbbVie's strong top-line growth emanating from Humira's continued dominance also gives it an attractive payout ratio of 59.4% at the moment, implying that its above-average yield should be sustainable moving forward.
Having said that, Humira could face an onslaught of knock-off drugs known as biosimilars within the next two to perhaps three years now that it's off patent in the United States. AbbVie does have a plan in place to extend the drug's effective period of exclusivity a while longer, but there's no guarantee it'll go off without a hitch. So, before you buy this high-yield pharma stock, you might want to dig into the company's broader product portfolio and clinical pipeline. Humira, after all, presently makes up over 60% of the drugmaker's annual revenues.
The king of beers
Keith Noonan (AB-InBev): There are over 5,000 breweries in the U.S. alone, but one company reigns supreme over the beer space. With a deep lineup of brands that includes Budweiser, Stella Artois, Corona, and many others, AB InBev has roughly 45% market share in America and still has big growth in international markets ahead.
The company's hold on the beer market intensified when it merged with SAB Miller last year and created an unrivaled powerhouse in the global industry. Miller actually had to sell off some of its biggest brands and divest from key markets in order for the deal to pass regulatory muster, but even then, some estimates suggest that the combined company now captures roughly 46% of profits in the space and produces 27% of the world's beer by volume. AB InBev's size allow it to exercise pricing strength, benefit from economies of scale, and put pressure on distributors to shore up shelf space and box out competitors.
Turning to returned income, the beer giant boasts a chunky 3.7% yield and has delivered annual payout growth for the last seven years; however, the cost of distributing its current dividend is higher than the company's trailing-12-month earnings -- with a payout ratio of 105%. On the other hand, its dividend disbursement is still covered by the company's trailing free cash flow, and management has promised to continue increasing its payout.
With an appealing dividend component and a near-monopoly position in the beer market, AB-InBev looks like a worthwhile investment.
A top energy play
Sean O'Reilly (Enterprise Products Partners, LP): The word "monopoly" is often a dirty one these days, and it has been for some time. The Federal Government actively seeks to squash any company deemed monopolistic and anticompetitive via the Sherman Antitrust Act, passed over 100 years ago in 1890. But despite its negative connotation, there are a few monopolies still in existence today. Not only that, but they are legal ones and bring with them monopolistic profits. Which brings me to my pick for this roundtable, none other than one of the largest energy infrastructure MLP in the country: Enterprise Products Partners, LP.
Despite its size, Enterprise Products Partners is planning to expand its empire even further in the coming years. It has a 571-mile long Natural Gas Liquid (NGL) pipeline currently under construction that will connect the Permian Basin with Mt. Belvieu, Texas -- part of the enormous Port of Houston. It also continues to expand into the transportation of petroleum products other than oil and gasoline, with plans to construct facilities servicing the producers of ethylene and isobutane in the works as well. Its monopolistic status stems from its ownership of 50,000 miles of pipelines and enormous petroleum-products storage facilities. Often, oil producers have no choice but to pay Enterprise Products a toll every time they wish to move their products.
In a world that seeks to quash monopolies, Enterprise Products is a fantastic, legal monopoly sporting a 6.8% dividend as icing on the cake.
