If you're looking to buy a big pharma stock, both AbbVie (ABBV -0.91%) and Pfizer (PFE -3.19%) have a lot to offer. AbbVie has been the bigger winner in recent years. The stock is up close to 130% over the past five years, while Pfizer's share price gained only 25% during the period.
But past performance doesn't count for much in deciding between two stocks. Which of these two pharmaceutical stocks is the better pick for long-term investors now? Here's how AbbVie and Pfizer compare.
The case for AbbVie
Growth, income, and value. Those are the reasons to buy AbbVie. And they're three really good reasons to do so.
Let's first look at the company's growth prospects. AbbVie still lays claim to the biggest-selling drug in the world: Humira. While the drug will face generic competition in Europe beginning later this year, AbbVie is set to enjoy several more years of generic-free worries in the more lucrative U.S. market. That gives the company plenty of time for its other drugs and pipeline candidates to generate more revenue.
Imbruvica should play a key role in accomplishing that goal. It's projected to become the No. 4 best-selling cancer drug in the world by 2022, with sales of $7.5 billion. AbbVie has another sure-fire blockbuster on the market now with hepatitis C drug Mavyret.
But it's AbbVie's pipeline that should really excite investors. The company hopes to win FDA approval for elagolix in treating endometriosis-associated pain in the third quarter of 2018. AbbVie recently submitted for approval of risankizumab in treating plaque psoriasis. Another autoimmune disease drug, upadacitinib, could win approval next year. In addition, the company hopes to secure more approved indications for several drugs already on the market, notably including cancer drug Venclexta.
As for income, AbbVie's dividend currently yields just under 4%. The drugmaker has increased its dividend by a whopping 140% since being spun off from Abbott Labs in 2013. AbbVie uses only 42% of its free cash flow to fund the dividend, indicating plenty of flexibility for more dividend hikes in the future.
You might think that a stock with strong growth prospects and a great dividend would be somewhat pricey. That's not the case for AbbVie. The stock trades at less than 12 times expected earnings. Factoring in the company's projected growth gives AbbVie a PEG ratio of only 0.75 -- making this big pharma a big bargain.
The case for Pfizer
While AbbVie relies on one drug -- Humira -- for close to 60% of its total revenue, Pfizer has a much more diversified portfolio. The company claimed eight blockbuster drugs in 2017, none of which generated more than 11% of Pfizer's total revenue.
Instead of facing the prospects of generic competition for its top drugs, Pfizer is moving past its patent cliff. Although the company's revenue growth continues to be weighed down somewhat by declining sales for several products that have lost patent exclusivity, the negative impact is becoming a lesser problem each year.
Like AbbVie, Pfizer has several growth drivers. The "big three" for Pfizer right now are cancer drug Ibrance, anticoagulant Eliquis, and autoimmune disease drug Xeljanz. The company also claims several newer drugs that should be significant winners: atopic dermatitis drug Eucrisa and type 2 diabetes drugs Steglatro, Steglujan, and Segluromet.
Pfizer awaits regulatory approval for several drugs. Two that should especially fuel growth for the company are lung cancer drugs dacomitinib and lorlatinib. Pfizer's pipeline also includes 28 late-stage programs. The company's head of research and development, Mikael Dolsten, said earlier this year that Pfizer expects to win approval for up to 15 blockbuster drugs or new indications for existing drugs over the next five years, up from five blockbuster launches between 2011 and 2016.
Its dividend is another draw for Pfizer. The dividend currently yields 3.83%. Pfizer has a long track record of dividend increases, broken only by a dividend cut in 2009 in connection with a big acquisition. The company's management prioritizes the dividend program very highly now. Pfizer uses a little over half of its free cash flow to fund the dividend, giving it similar flexibility as AbbVie in rolling out future dividend increases.
Like AbbVie, Pfizer looks like a good bargain with its forward earnings multiple of 11.7. However, the drugmaker's PEG ratio of 1.86 is higher, primarily because falling sales for Pfizer's older drugs are expected to hold back overall growth.
In some ways, Pfizer and AbbVie are like the proverbial tortoise and the hare. AbbVie will enjoy faster growth, but Pfizer might not experience the volatility its rival could have. We saw some of this volatility for AbbVie in March when a clinical failure for experimental cancer drug Rova-T wiped out a big chunk of the company's market cap.
I personally own both of these stocks and expect both of them to be winners over the long run. AbbVie's and Pfizer's great dividends give them an immediate advantage in generating solid total returns.
If I could only choose one of them, though, I'd go with AbbVie. It has better overall growth prospects despite the Rova-T setback and a slightly higher dividend yield. AbbVie is more exposed to pipeline risk because of its dependence on Humira. However, I think this big pharma stock makes a nice addition to the portfolios of investors looking for solid growth, value, and income.