Dividend investors on the hunt for above average income opportunities may want to place a heavy emphasis on pharmaceutical stocks next year. Despite the political turmoil surrounding the Affordable Care Act (aka Obamacare), the pharmaceutical industry is still growing at a healthy clip, thanks primarily to the introduction of several game-changing new therapies for cancer and rare diseases over the past few years.
Within the realm of Big Pharma, for instance, AstraZeneca (AZN 1.15%), Pfizer (PFE), and Sanofi (SNY 1.29%) all offer juicy dividend yields that exceed 3% at the moment, as well as broadly positive outlooks from both a near -- and long-term perspective. Armed with this insight, let's consider why these three pharmaceutical giants may be worth owning in 2018, and beyond.
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AstraZeneca is deeply committed to its dividend
During its third-quarter earnings call last month, CEO Pascal Soriot adamantly reaffirmed the company's commitment to paying a top-notch dividend. Even so, the Street still has serious doubts about Astra's ability to sustain its dividend program at current levels.
The drugmaker, after all, is presently going through a major product churn that centers around a pivot to the high-risk oncology space. Moreover, it currently pays out a sky-high annualized yield of 8.4% that's well-above industry norms; and the company's elevated payout ratio of 91.4% also seems to suggest that a reduction, or a suspension, is in order.
Putting this doom and gloom aside for the moment, Soriot's positive outlook may, in fact, be more than simply wishful thinking. After all, Astra now sports five major oncology drugs following the recent approval of its blood cancer treatment, Calquence, for second line mantle cell lymphoma.
The point is that Calquence has the real world potential of eventually evolving into a go-to treatment for a variety of blood-based disorders; and Astra's checkpoint inhibitor, Imfinzi, is still in the running to become a backbone therapy for a diverse range of solid tumors as well, despite the drug's recent setbacks in non-small cell lung cancer. As such, Astra could be on the verge of generating double-digit levels of top-line growth in the not-so-distant future. All it needs is a little luck in the clinic.
Pfizer's dividend should be a safe bet in 2018
With an annualized yield of 3.6%, Pfizer certainly occupies a spot in the upper tier of dividend-paying healthcare stocks. What truly sets this top dividend stock apart from its peers in the healthcare sector, however, is the company's enormous cash reserves and stellar free cash flows.
Pfizer, after all, is set up to be one of the top beneficiaries of the Republican tax reform that's now making its way through Congress. If this reform becomes law, the drugmaker may have access to upwards of $80-plus billion in foreign profits that are currently stashed overseas. And that's on top of the $17 billion the drugmaker reportedly already has in its domestic coffers. Stated simply, Pfizer could go on an unprecedented spending spree to tack on multiple bolt-on acquisitions, and still be able to support its top notch dividend program, thanks to its ginormous cash reserves.
As an added safety feature, Pfizer also has exceptional free cash flows that are the lifeblood of its generous shareholder rewards program. Despite the drugmaker's ongoing battle with the patent cliff, for example, Pfizer reported a noteworthy $15.5 billion in free cash flows over the past twelve months. While that figure is forecast to dip modestly over the next two years -- due to both Viagra and Lyrica staring down possible generic threats, the company's robust late-stage clinical pipeline is on track to bring enough new products online to pick up the slack, so to speak.
In all, Pfizer has an exceptionally rich yield for a company of its size, and its elite payout is about as rock solid as they come.
Sanofi is a great bargain
Sanofi's forward-looking yield of 3.8% makes it one of the most generous dividend stocks in the entire healthcare sector. Apart from its juicy yield, though, this French pharma stock is also arguably an incredible bargain at current levels.
Because of Wall Street's deep concerns about Sanofi's top-line in the wake of its diabetes drug, Lantus, going off patent, this titan of the industry is trading at a rock bottom price to sales ratio of 2.51 right now. That's among the absolute lowest in terms of either large cap healthcare stocks in general, or Big Pharma stocks in particular.
To be fair, Lantus' sales are indeed falling off the proverbial patent cliff -- with the drug's third-quarter sales lagging by 15.5% compared to the same period a year ago. And Sanofi's presumptive replacement for Lantus in its diabetes franchise -- Toujeo -- also has a long way to go before it can realistically offset these hefty losses.
However, the strong commercial launch of Sanofi's anti-inflammatory medicine Dupixent, the double-digit sales growth of its multiple sclerosis franchise, and the continued strength of the drugmaker's pediatric vaccine business, have it on solid footing going forward. In fact, Wall Street expects Sanofi's top-line to grow -- albeit modestly -- by 2.4% next year.
All told, Sanofi's stock is a little more risky than many other Big Pharmas because the company has yet to solve its Lantus problem, but its favorable yield and attractive valuation arguably make it worth the risk.
