Pay less to get paid more. That's exactly what can happen when you buy solid dividend stocks that trade at bargain prices. But can these kinds of stocks be found? Absolutely.
AbbVie definitely checks off the "cheap" box using a couple of valuation metrics. The big pharma stock trades at only 11 times expected earnings. And thanks to strong projected earnings growth, AbbVie's price-to-earnings-to-growth (PEG) ratio is a low 0.77.
Investors might drool a bit over AbbVie's dividend yield of 3.73%. AbbVie has increased its dividend payout by 140% since the company was spun off from Abbott Labs in 2013.
More dividend hikes should be on the way. AbbVie uses only 42% of its free cash flow to fund the dividend program, giving the company plenty of financial flexibility to increase its dividend.
If the bargain price and great dividend aren't enough for you, consider that AbbVie claims several growth drivers that could push its share price upward. Imbruvica is one of the fastest-growing cancer drugs on the market. Another drug in the company's oncology lineup, Venclexta, has tremendous potential. AbbVie's new hepatitis C virus (HCV) drug Mavyret stole the limelight in the company's first-quarter update.
The big pharma company also boasts a solid pipeline with several potential blockbusters. Elagolix should be on course to win Food and Drug Administration (FDA) approval for treating endometriosis within the next few months. AbbVie expects to launch two new drugs targeting treatment of autoimmune diseases next year -- risankizumab and upadacitinib.
2. Gilead Sciences
Gilead Sciences is one of the three cheapest healthcare stocks on the market using the enterprise value (EV)-to-EBITDA ratio. The big biotech stock also is inexpensive based on its forward earnings multiple of 10.8.
What about the dividend? Gilead looks great in that department, as well. Its dividend yield currently stands at 3.5%. Gilead didn't initiate its dividend until 2015, but since then, the company has increased its payout every year, with cumulative dividend growth of nearly 33%.
Unlike AbbVie, Gilead stock hasn't performed very well recently. Over the last three years, Gilead's share price has dropped nearly 40% as its HCV sales declined. However, better days could be ahead for Gilead, as it expects sales for its HCV drugs to stabilize this year. In addition, it launched a new HIV drug, Biktarvy, in the first quarter, and market research firm EvaluatePharma projects it will be the biggest new drug launched in 2018.
There's a lot to like about Gilead's pipeline, too. The biotech could have another blockbuster on the way with anti-inflammatory drug filgotinib. Perhaps even more important, Gilead is one of the leaders in developing drugs for treating non-alcoholic steatohepatitis (NASH). Some observers think that the NASH treatment market could reach $35 billion annually over the next several years.
Both AbbVie and Gilead face some risks. AbbVie still depends heavily on its top-selling drug, Humira. The drug faces biosimilar competition in Europe later this year and in the U.S. beginning in 2023. AbbVie had a significant pipeline setback in March. Another big clinical failure would definitely hurt the company.
For Gilead, there's the chance that its HCV sales won't stabilize as expected. The biotech really needs Biktarvy to deliver on its potential. Gilead also can't afford a big pipeline setback for filgotinib or its NASH candidates.
Neither AbbVie nor Gilead are worry-free stocks, but I like the prospects for both drugmakers. Both companies offer investors attractive valuations, mouth-watering dividends, and potential growth, and I think both AbbVie and Gilead Sciences are great stocks to buy right now.