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Get Paid While You Wait: 3 Top Dividend Stocks in Big Pharma

By Cory Renauer – Updated Apr 24, 2018 at 7:53AM

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It's a lot easier to be patient once those quarterly payments start adding up.

AbbVie Inc. (ABBV -5.96%), Pfizer Inc. (PFE -0.91%), and Merck & Co. (MRK -0.60%) are developing drugs that could drive profits, and their share prices, through the roof in the years ahead. Of course, there are plenty of reasons things might not work out as planned. 

Innovative new drugs make these some of the best big pharma stocks you can buy right now, but unlucky clinical trial results, unfavorable FDA decisions, and competition can quickly alter such assessments and hammer stock prices. However, all three of these stocks offer yields above 3% that could smooth out potential potholes along their road to growth.

Company Dividend Yield Payout Ratio Dividends Paid as Percentage of Pre-Tax Profit in 2017
Merck & Co Inc. 3.3% 216% 79%
Pfizer Inc. 3.7% 36% 62%
AbbVie Inc. 4.2% 77% 53%

Data source: FinViz, SEC Filings.

1. Merck & Co Inc.: A new standard?

This company has a lot riding on its lead drug, a cancer therapy with blockbuster sales growing by leaps and bounds. Merck launched Keytruda at the end of 2014, and sales of the drug already hit a $5.2 billion annualized run rate during the last three months of 2017. 

Merck has an FDA lung cancer approval to thank for Keytruda's recent sales growth. Last May, the agency made adding it to standard chemo an approved treatment option for newly diagnosed non-small cell lung cancer patients with tumors that have already started spreading. Look for continued growth following recently released results that show adding Keytruda to standard chemo reduced the risk of death by half.

Although it looks like the coast is clear for Merck's lead growth driver, its single largest revenue stream at the moment has plateaued and could start backsliding. Januvia is an aging treatment for type 2 diabetes that's been facing some pricing pressure in an increasingly competitive space with new treatment options.

Merck relied on its Januvia franchise for around 15% of total sales last year, and an accelerating contraction could force Merck to halt a dividend program that's already stretched awfully thin. The company booked a huge one-time tax-related expense that threw its payout ratio out of whack. As a percentage of pre-tax profit, though, the payout's still too high to expect more annual raises if Januvia sales can't hold steady.

Money and plants growing in jars.

Image source: Getty Images.

2. Pfizer Inc.: More diverse 

Recent tax reform skewed our view of Pfizer's finances as well. While AbbVie and Merck reported one-time charges, Pfizer reported a $9 billion benefit that makes its dividend look a lot more well-funded than it really is. As a percentage of pre-tax profits, Pfizer's dividend is stretched a bit thin as well, but it looks like a diverse product lineup can keep the payout rising.

Pfizer has two big growth drivers in Ibrance, a breast cancer tablet, and Eliquis, a next-generation blood thinner. Sales of Ibrance grew 46% last year to $3.1 billion and Eliquis rose 47% to $2.5 billion. Pfizer has several new drugs in late-stage testing, including talazoparib, the prized oncology candidate that inspired a $14 billion acquisition of Medivation in 2016.

Pfizer's established health unit, where it relegates products that have lost patent protected exclusivity, creates a mighty fierce headwind to overcome. The struggling segment is responsible for around 40% of the total product sales. Sales from the segment fell 11% in 2017 and will probably contract again in 2018.

3. AbbVie Inc.: Headwind delayed

This big pharma depends on its rheumatoid arthritis injection Humira for around two-thirds of total sales, which is going to be a big problem in a few years. Unlike Merck and Pfizer, though, nearly all of AbbVie's main product lines are moving in the right direction at the moment.

A few years ago, most analysts assumed that Humira sales would have already started tanking because its main U.S. patent expired last year. Now AbbVie thinks sales of the drug will rise from $18 billion in 2017 to a stunning $21 billion by 2020.

A lack of significant headwinds helped this top dividend-paying pharma stock to raise its payout 140% since 2013. With sales already firing on all cylinders, several potential new drug launches on the horizon could kick profit growth and dividend raises into an extra high gear.

An easy favorite

In just about every way that matters, AbbVie looks like the best dividend paying big pharma stock that you can buy right now. Merck and Pfizer offer above average yields that they can probably sustain, but AbbVie offers an even higher yield that you can reasonably expect to rise.

Humira sales could tank in a few years and make further increases difficult, but we could have said the exact same thing a few years ago. If the doomsday predictions finally materialize, at least you'll have accumulated a heap of dividend payments to soften the blow.

Cory Renauer owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has the following options: short May 2018 $85 calls on Gilead Sciences. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
$86.12 (-0.60%) $0.52
Pfizer Inc. Stock Quote
Pfizer Inc.
$43.76 (-0.91%) $0.40
AbbVie Inc. Stock Quote
AbbVie Inc.
$134.21 (-5.96%) $-8.51

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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