It's often said that there are two certainties in life: death and taxes. Well, a near certainty in life is that the cost of goods and services will continue to rise. That's what economists refer to as inflation, which can be summed up as the general decline in the purchasing power of a dollar as things become more expensive.
Since the consumer price index (an inflation indicator) rose 5.3% year over year in August, it's as important as ever to buy dividend stocks that can raise their dividend ahead of inflation to gain purchasing power. Here are two biotech stocks that not only can stay ahead of inflation through strong dividend increases but that are fairly priced and offer enticing 3% yields.
1. Bristol Myers Squibb
Bristol Myers Squibb (BMY -0.25%) is the first biotech stock that investors should consider purchasing in October. It will be facing the loss of exclusivity on its three top-selling drugs by the end of this decade: cancer drugs Revlimid and Opdivo, as well as the anticoagulant drug, co-developed alongside Pfizer known as Eliquis. Together, these three drugs made up 68% of Bristol Myers Squibb's $23 billion in revenue for the first half of the year. The three drugs were able to grow their combined revenue at a 10% year-over-year clip to $15.5 billion in the first half of this year, which bodes well for Bristol Myers Squibb's outlook in the medium term. That's why analysts expect Bristol Myers Squibb's earnings per share to grow 7% annually over the next five years.
Bristol Myers Squibb's top three drugs will realistically pull in somewhere in the low $30 billion range for this year. And even when they each experience their patent expirations later this decade, a good portion of that revenue will continue to be produced for the company. Since Revlimid and Eliquis won't face competition until 2026 to 2028, I believe the company's three top-grossing drugs will still generate $15 billion in annual sales heading into the next decade. But does the company have the existing pipeline or the means to replace inevitable revenue declines when its three top drugs face stiff competition in the second half of this decade?
The company believes that its recently launched products and anticipated drug launches will be able to create $20 billion to $25 billion in new sales by 2029. Anemia drug Reblozyl and multiple sclerosis drug Zeposia are two newly launched drugs that will feature prominently in the company's growth plans. The anticipated launches of rare heart disease drug mavacamten and immunology drug deucravacitinib are two more opportunities with blockbuster potential.
CEO Giovanni Caforio mentioned in his opening remarks during Bristol Myers Squibb's Q2 2021 earnings call that its strong balance sheet will allow the company to diversify and strengthen its long-term prospects via acquisitions. This is reasonable given that the company maintained a cash balance of $11 billion at the end of Q2 2021, which is nearly 9% of its $127 billion market capitalization.
With a payout ratio set to be in the mid-20% range for this year, Bristol Myers Squibb should comfortably be able to hand out high-single-digit percentage dividend increases for the foreseeable future. Despite solid fundamentals, Bristol Myers Squibb's 3.4% dividend yield is well above its 13-year median yield of 2.9%. This signals that Bristol Myers Squibb is trading at an attractive valuation for long-term income investors looking to at least keep up with inflation.
2. Johnson & Johnson
The other biotech stock that investors concerned about inflation should buy in October is Johnson & Johnson (JNJ -0.37%). It has raised its dividend for 59 consecutive years, which itself is an impressive feat that makes the stock a Dividend King. What really sets Johnson & Johnson apart from even other Dividend Kings is that the company has managed to beat inflation with its dividend increases for all but one of those years: when inflation was 13.5% in 1980. With the Federal Reserve expecting a 4.2% inflation rate for this year and Johnson & Johnson's 5% dividend increase earlier this year, Johnson & Johnson's inflation-beating dividend increase streak should reach 40 years at the end of 2021.
A key component of Johnson & Johnson's success over the years is that it maintains a diversified business with its pharmaceutical, medical devices, and consumer health segments. Strength in Johnson & Johnson's pharmaceutical and consumer health segments last year enabled revenue to inch higher to $82.6 billion despite COVID-19-induced procedure delays, which led to a drop in the medical devices segment. Johnson & Johnson's diversified business mix and strong drug portfolio are why analysts forecast the stock will deliver 9% annual earnings growth through the next five years.
Since Johnson & Johnson's payout ratio will be in the low 40% range for this year, the dividend should be able to continue to grow at a mid- to upper-single-digit percentage rate annually in the years ahead. Pairing this dividend growth potential with Johnson & Johnson's current 2.7% dividend yield provides quite a bit to like for income-focused investors. And since Johnson & Johnson's trailing-12-month dividend yield of 2.6% is just below its 13-year median yield of 2.7%, the stock is trading approximately in line with its fair value.