Stock market corrections are part and parcel of the investing process. As such, investors shouldn't get too worked about this inevitability. The current market, though, is starting to show ominous warning signs about a potential downturn. Valuations across the large cap space appear to be stretched in many instances, with 44 large cap equities trading at over 50 times forward-looking earnings right now -- 45 of which are valued at more than 100 times next year's earnings. Moreover, inflation hit a three-decade high in the U.S. last month. The Fed, in turn, may be forced to raise interest rates soon, which is potentially bad news for stocks, as rock-bottom interest rates have been one of the main drivers behind this record-breaking bull market.
What should investors do to prepare for a possible market correction in the coming months? Blue chip stocks that offer higher-than-average dividend yields could prove to be a viable safe haven for investors in the event of a marketwide downturn. Keeping with this theme, the healthcare giants AbbVie (ABBV -0.26%) and Gilead Sciences (GILD -0.54%) both sport handsome dividend yields, well-rounded product portfolios, and valuations that are downright bargains relative to their large-cap peers. Here's a brief rundown on the pros and cons of these two defensive-oriented high-yield dividend stocks.
AbbVie: A Dividend Aristocrat trading at a deep discount
Illinois-based drugmaker AbbVie is a proven commodity as a passive income generator. The company's stock currently yields a handsome 4.82% on an annualized basis, it's a Dividend Aristocrat, and the drugmaker has boosted its dividend by a whopping 250% since becoming an independent entity in 2013. Topping it off, the drugmaker's shares are presently trading at less than nine times 2021 projected earnings, which is well below the industry average. There are a handful of important risk factors associated with this Dividend Aristocrat, however.
First, AbbVie's payout ratio stands at 122%, implying that its stellar yield might not be sustainable over the long term. Second, the company is facing biosimilar competition in the U.S. for its top-selling anti-inflammatory medication Humira starting in 2023. AbbVie has prepared for this eventuality by being hyperaggressive on the merger and acquisition scene. Moreover, the company has also successfully developed multiple new growth products, such as the immunology drugs Rinvoq and Skyrizi.
Unfortunately, Rinvoq might be relegated to second-tier status in the wake of a classwide restriction on JAK inhibitors by the Food and Drug Administration (FDA) earlier this year. This safety issue could turn out to be a big deal in regard to AbbVie's fortunes. Rinvoq, after all, was expected to generate upward of $8 billion in revenue for the company in 2025. Even though AbbVie still has big plans for Rinvoq from a label expansion standpoint, it's not altogether clear how this FDA restriction will ultimately impact the drug's commercial prospects.
Why is AbbVie still a safe bet in uncertain times? Forget all the noise surrounding Humira and Rinvoq. The fact of the matter is that AbbVie's management has been absolutely brilliant at navigating troubled waters pretty much since the company's inception. What's more, this all-star managerial team has placed a huge emphasis on growing the biopharma's dividend and top line over the last eight years. There's no reason to believe that AbbVie's C-suite will suddenly fail to deliver for shareholders, even in the face of these hurricane-force headwinds.
Gilead: An underappreciated high-yield dividend play
California-based Gilead Sciences has seen its shares gain a healthy 15.8% so far this year. Even so, the biotech's shares are still trading at less than 10 times forward-looking earnings. Gilead's stock has failed to earn a premium valuation over the past few years for a variety of reasons. The biggest reason, however, is the company's various missteps on the business development front.
Gilead has spent billions on questionable business development deals, such as its $12 billion buyout of the anti-cancer cell therapy company Kite Pharma, as well as its costly collaboration with Galapagos NV for the anti-inflammatory medicine filgotinib. In fact, if it weren't for Gilead's unexpected win in the COVID-19 space with Veklury, the biotech would have posted negative top-line growth this year.
Be that as it may, Gilead appears to be close to an inflection point from a growth perspective. Although the biotech's top line is expected to dip next year as demand for Veklury wanes, Gilead should be able to turn things around as soon as 2023 due to its emerging oncology portfolio.
For example, the biotech's newly acquired CD47 asset, magrolimab, could become a major new treatment option in both the solid and liquid tumor settings. Gilead's triple-negative breast cancer drug Trodelvy is also on track to haul in over $4 billion in peak sales within the current decade, and its anti-cancer cell therapy franchise -- via the Kite pharma acquisition -- is finally starting to gain momentum following the FDA approval of Tecartus for relapsed or refractory acute lymphoblastic leukemia.
On the dividend side of things, Gilead sports a juicy 4.21% yield on an annualized basis right now. Equally important, the biotech's payout ratio currently stands at 47.8%. Gilead thus has considerable room to continue to raise its already above-average dividend. So, if you're looking for a reliable income play in a turbulent market, this large-cap biotech stock should definitely be on your radar.