The stock market has been bullish for years now, and most companies are richly valued as a result. Meanwhile, dividend yields remain low -- right now, the SPDR S&P 500 ETF (SPY 0.95%) offers just 1.7%.
What's an investor seeking returns to do?
One attractive option is the pharmaceutical sector, where some large-cap companies are maintaining the winning trifecta of a stable dividend yield, ongoing earnings growth, and attractive valuation. For these three businesses in particular, company-specific events including acquisitions and new drugs make for particularly enticing prospects. Let's take a look at AbbVie (ABBV -4.58%), Bristol-Myers Squibb (BMY 0.34%), and Gilead Sciences (GILD 0.23%).
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What to like about all of them
Each of these companies looks set to maintain or increase its dividend in 2020, and each is attractively priced relative to the S&P 500. As a whole, the S&P 500 is currently selling for 19 times anticipated 2020 earnings per share. Bristol-Myers Squibb trades for slightly less than 9 times projected 2020 earnings estimates, and AbbVie trades for less than 10 times 2020 earnings estimates. Gilead, meanwhile, trades at 10.5 times anticipated EPS.
Earnings at pharmaceutical companies tend to be stable because these businesses are not particularly sensitive to weak economic growth. People need drugs in good times and bad, and consumers are unlikely to cancel or even delay filling their prescriptions in response to lower personal income. These companies are also market leaders in treating several large and growing chronic conditions, which translates into a recurring and growing revenue base as existing customers are retained and new ones are brought in. And there's a lot of growth possible in the form of new drugs, additional indications for approved drugs, and the acquisition and/or licensing of other drugs from other pharmaceutical and biotechnology companies.
What to like about AbbVie
AbbVie offers a 5.4% dividend yield, and its pending merger with Allergan (AGN) should expand its drug portfolio, cut costs by reducing headcount and other expenses, and increase its pipeline of promising drug candidates.
While the company's total revenue for 2019 grew by only 1.6%, U.S. sales of its blockbuster drug, Humira, were up 8.6%, and worldwide sales of another big name, Imbruvica, were up more than 30%. Humira, which is injected under the skin, is a medication used to treat rheumatoid arthritis, psoriatic arthritis, and several other conditions. Imbruvica, taken orally once a day, treats certain cancers such as mantle cell lymphoma, chronic lymphocytic leukemia, and small lymphocytic lymphoma.
AbbVie expects to deliver standalone adjusted diluted earnings of between $9.61 and $9.71 a share in 2020, up 7.5% to 8.7%; this guidance excludes intangible asset amortization expenses and other non-cash charges. Management expects that standalone revenue could grow by about 8% on an operational basis, which excludes the impact of a potential change in foreign exchange rates.
What to like about Bristol-Myers Squibb
With the recently completed acquisition of Celgene, Bristol-Myers Squibb (which offers a 2.8% yield) has significantly expanded its product portfolio and increased its pipeline of new drugs, as well as securing a significant opportunity to expand the labels of existing drugs.
Excluding the Celgene acquisition, total revenue grew by 7.9% to almost $23.4 billion in 2019, thanks to a 23% increase in sales of Elquis and a 7% rise in sales of Opdivo. Elquis, an alternative to warfarin that does not require monitoring by blood tests, treats and prevents blood clots in patients following hip or knee replacement and in those patients with a history of prior blood clots. Opdivio, which is administered via intravenous infusion over 30 minutes, treats advanced non-small-cell lung cancer that has spread or grown in patients who have already tried chemotherapy that contained platinum.
In 2020, thanks to the full-year impact of Celgene and continued improvement in the core business, Bristol-Myers Squibb expects to report revenue between $40.5 billion and $42.5 billion (up from $26.1 billion in 2019) and non-GAAP earnings per share of between $6 and $6.20 a share (up from $4.69).
What to like about Gilead Sciences
In 2020, Gilead is likely to use part of its short-term cash balance of almost $26 billion (as of Dec. 31) to repurchase additional shares of its common stock and/or increase its annual dividend payment per share, which currently stands at 4%.
Importantly, total revenue was up for the first time in four years with a rise of 2% in 2019. The 12% increase in revenue for core HIV treatments and the 73% growth in Yescarta revenue more than offset the 20% drop in revenue from HCV (hepatitis) treatments. Yescarta modifies a patient's own white blood cells to recognize and destroy cancer cells, and has been prescribed to treat certain types of non-Hodgkin lymphoma in adults.
For 2020, Gilead expects to report product sales of between $21.8 billion and $22.2 billion, compared with $22.1 billion for 2019. These estimates reflect continued growth in the core HIV drug franchise, an expansion of cell therapy revenue, the full-year impact of the loss of two drug patents, and the potential entry of a generic counterpart to its HIV treatment, Truvada, in late 2020.
Management also anticipates non-GAAP diluted earnings per share of between $6.05 and $6.45 per share, up from $6.13 per share in 2019, as the company benefits from stable to slightly higher gross product margins, lower outstanding shares of its common stock, and a more modest, single-digit percentage growth in operating expenses.
A prescription for income
In a highly valued market with low interest rates, it can be hard to find promising investments. The pharmaceutical space offers stability in its earnings forecasts and dividend payments, and the above three companies in particular stand out as high-paying stalwarts with room to grow. Investors looking for yield as well as growth should find plenty to interest them here.
