During a tough week for the overall market, pharmaceutical stocks across the board fell a few notches despite a lack of significant news for the industry itself. That brought already attractive dividend yields for Pfizer Inc. (PFE 0.28%) and Gilead Sciences Inc. (GILD 0.35%) firmly into the 3% range.
A yield above 3% won't do you much good if the underlying businesses can't fuel its continued growth. Here's what puts these big pharma payouts on better footing than most.
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Pfizer Inc.: Time to shine
Over the past five years, Pfizer has been able to raise its dividend 42% despite declining sales for aging blockbusters that lost patent protection and a sterile injectibles business that suffered major product shortages after it was acquired. Now that the worst is over, a strong product lineup and bulging pipeline could allow America's largest pharmaceutical company to direct a ton of cash toward its shareholders. That means the 3.1% yield the stock offers now will probably rise a lot faster than the pace of inflation.
Over the past year, Pfizer has generated a stunning $15.3 billion in free cash flow but used just 51% to meet its dividend commitment. That leaves plenty of room for big payout bumps ahead fueled by drugs like Eliquis. Sales of the next-generation blood thinner jumped 41% in the first half of 2018 to $1.7 billion, and that isn't the only growth driver at the moment.
Pfizer's rheumatoid arthritis tablet, Xeljanz, recently earned approvals that expand its addressable patient population to include people with psoriatic arthritis and ulcerative colitis. The expansions helped Xeljanz sales jump 34% higher in the first half to $788 million, and unmet need for these conditions could push annual sales of the drug beyond $2.5 billion within a few more years.
Pfizer kicked off 2018 with expectations to earn approvals for up to 15 indications worth at least $1 billion in annual sales. Some have already been approved, such as Xtandi, which recently became the first oral treatment for prostate cancer patients before and after their disease has spread. Pfizer's also looking forward to an FDA approval decision in December, or earlier, that could make talazoparib a blockbuster oral treatment for advanced-stage breast cancer patients.
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Gilead Sciences Inc.: Turnaround time
This drugmaker offers an above-average 3.1% yield at recent prices because investors are worried about sinking hepatitis C antiviral (HCV) sales. The company's HCV segment fell hard in response to competition from AbbVie's (ABBV 0.18%) Mavyret, but a bold move could stabilize the franchise.
Gilead recently launched generic versions of its own branded treatments priced to compete with AbbVie. Despite a lower list price, net sales for the company's HCV franchise will probably stabilize at an annualized run rate of around $4 billion based on second-quarter sales.
Hospitals and insurers have had a hard time working out how to pay for Gilead Sciences' recently launched cellular cancer therapy, Yescarta, which hit a $272 million annual run rate in the second quarter. Now that more details have been hammered out, though, sales could top $2 billion annually within a couple short years if incoming competition doesn't get in the way first.
The company's biggest growth driver is far and away Biktarvy, the first and only single-tablet regimen approved to treat newly diagnosed HIV patients as well as those already on another drug. Plenty of patients are already beginning Biktarvy treatment, and they're expected to drive overall sales of the drug past $6 billion annually at its peak.
Gilead and its collaboration partner Galapagos NV (GLPG 0.17%) recently posted data that suggests their oral rheumatoid arthritis candidate, filgotinib, has what it takes to become a blockbuster drug as well. Filgotinib is behind similar new drug candidates on the development timeline, but way ahead in terms of its safety profile. If the oral rheumatoid treatment can launch with its safety profile intact, it could end up leading the pack.
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Gilead has raised its payout by a double-digit percentage every year since beginning a dividend program in 2016, yet used just 34% of free cash flow generated over the past year to make all the payouts. That gives new shareholders a good chance to see similar payout bumps down the road.
Remember the risks
It's important for investors to remember that Pfizer and Gilead aren't bulletproof. Gilead is relying heavily on Biktarvy for growth -- if anything impedes its progress, the stock price could take a hit. Pfizer isn't reliant on any single drug, but legacy products with declining sales need constant replacement.
Strings of bad luck happen to the best of them, but growth drivers pushing up the needle now make these above-average pharmaceutical dividends the best you'll find in the industry.
