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2 Cheap Pharma Stocks That Pay A Tidy Dividend

By Alex Carchidi – Updated Nov 22, 2021 at 11:36AM

Key Points

  • Undervalued stocks tend to be cheap for a reason.
  • Pharma companies often have the strong cash flows necessary to pay dividends.
  • Paying a healthy dividend doesn't guarantee that the dividend or the stock will grow.

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These stocks are unlikely to beat the market, but they're great for dividend income.

When it comes to dividend investing, pharmaceutical stocks can be quite appealing. Because they can count on a regular volume of sales for their established medicines, they tend to have a bottom line that is stable enough to pay out dividends for years and years. 

Of course, that makes shares of those companies quite hard to find at a bargain. Today, I'll be looking at two such pharma businesses that are both undervalued and that don't skimp on the dividend. But, beware, because they both have a few warts.

Two doctors in a clinic talk to each other while one holds a tablet.

Image source: Getty Images.

1. Viatris

Viatris (VTRS -1.07%) is a generic drug manufacturer that was created when Pfizer spun off and combined its manufacturing unit with the pharmaceutical company Mylan late last year. Given that people aren't going to stop needing generic drugs anytime soon, Viatris can count on steady demand for its products for the foreseeable future, and it's always starting new production lines to serve the market's needs. So, once it becomes profitable, it should be able to have steadily increasing free cash flow (FCF) over time.

Right now, it pays a dividend that has a forward yield of 3.12%. That dividend may not seem like it's a massive windfall at the moment, but the company plans to raise the dividend over time as its cash flows improve and its debts are paid off. 

In my view, Viatris' stock is cheap because it hasn't yet had the time to demonstrate its ability to profitably manufacture drugs, as it's a newly formed entity with barely a year under its belt. But, that just means forward-thinking investors have an opportunity to get in at the ground level, before the wider market recognizes the stock's potential. As a group, generic drug manufacturers trade at an average trailing price to sales (P/S) ratio of 4.71. In contrast, Viatris' sales multiple of 0.94 makes it look like a steal.

There's no guarantee that Viatris will be able to drop its costs enough while producing the most lucrative generics, and the next few years will be pivotal in the company's history. Management anticipates things really starting to pick up past 2024, which may justifiably feel quite distant for many investors. Still, if you're looking for a decent dividend that just might grow tremendously over time, and you don't want to pay very much for it, you won't have too many options that fit the bill like Viatris does. 

2. GlaxoSmithKline

As one of the world's largest biopharma businesses, GlaxoSmithKline (GSK 1.46%) makes a galaxy of essential drugs, vaccines, and consumer health products. If you've ever had a headache and reached for an Advil, you're one of its customers. GSK also has a massive pipeline of medicines in development, including a plethora of late-stage candidates that should start to yield revenue in the next few years, provided that regulators give the green light.

Despite its demonstrated long-term acumen at profitably developing and commercializing drugs, the company's stock is somewhat undervalued. The pharmaceutical industry's trailing P/S multiple is 4.8, whereas GlaxoSmithKline's stock trades at a P/S of 2.45. That might be a reaction to its weak quarterly revenue growth, which was only 5% year over year as of Q3. And its earnings are doing even worse, contracting by 6.1% in the third quarter. 

Recent difficulties aside, its dividend has a forward yield of 5.08%, which is quite high. Unfortunately, you probably shouldn't count on its dividend payment to rise consistently over time. In the last five years, the company's dividend has risen and fallen numerous times without trending strongly upward or downward. 

In closing, you don't need to avoid this stock, just recognize that its high dividend yield and attractive price point are signs that rapid growth probably isn't in its future. If you're just looking for a pharma-based cash flow at a decent price, it'll do the trick.

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends GlaxoSmithKline and Viatris Inc. The Motley Fool has a disclosure policy.

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