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3 Best Buffett Stocks to Buy for the Long Haul

By Kody Kester – Dec 24, 2021 at 8:08AM

Key Points

  • Johnson & Johnson offers investors a 2.5% dividend yield as it is planning its spinoff of its consumer health segment.
  • Bristol Myers Squibb and its 3.5% yield is built to withstand the key patent expirations occurring later this decade.
  • AbbVie's 4.4% dividend yield should be supported by its robust pipeline, even as Humira's U.S. patent expires in 2023.

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Each of these three big pharma stocks are featured in Berkshire Hathaway's massive portfolio.

Since Warren Buffett took full control of Berkshire Hathaway in 1965, it became a diversified holding company with investments in publicly traded companies totaling nearly $345 billion at the time of writing.

The Oracle of Omaha's reputation of buying the highest quality businesses means that many individual investors could also benefit from adding these stocks to their portfolios. Here are three healthcare stocks that Buffett owns, which you may also want to consider buying and holding for the long run.

A patient attends an appointment with her doctor.

Image source: Getty Images.

1. Johnson & Johnson

The first pharma stock within Berkshire's portfolio to contemplate purchasing is Johnson & Johnson (JNJ -0.96%). While the stock is one of Buffett's smallest holdings, valued at just under $55 million, this doesn't take away from its 59 consecutive years of dividend increases that make the stock a Dividend King

J&J will be spinning off its slower-growing and less profitable consumer health segment in the next 18 to 24 months, which should allow the company to focus on its faster-growing, more profitable pharmaceutical segment.

J&J has a strong existing drug portfolio, which should be able to make up for the upcoming 2025 to 2026 patent expirations for its top-selling drug known, Stelara. Year to date, the immunology drug made up just 9.9% of J&J's $69 billion in net sales.

These drugs include the immunology blockbuster Tremfya, which received its first of three U.S. Food and Drug Administration (FDA) approvals to date in July 2017. Another drug that was recently approved by the FDA was the oncology blockbuster called Darzalex, which received its first of nine FDA approvals to date in November 2015. These two drugs have grown their year-to-date revenue at high-40% clips year over year and should remain under patent most of this decade.

J&J's enviable existing drug portfolio and its nearly four dozen indications in late-stage clinical trials explain why analysts anticipate that the stock will deliver 8% annual non-GAAP (adjusted) earnings per share (EPS) growth over the next five years. 

Income investors can scoop up J&J's 2.5% dividend yield at a forward P/E ratio of just 16.2 times, which makes the steady healthcare stock a great buy for the long term

2. Bristol Myers Squibb

Another Buffett stock that could be a great fit in your portfolio is Bristol Myers Squibb (BMY 0.19%). Berkshire's Bristol Myers Squibb stake totals nearly $1.4 billion, making it one of the largest healthcare holdings in Berkshire's portfolio.

Bristol Myers Squibb's oncology blockbusters Revlimid and Opdivo and the anticoagulant blockbuster co-owned with Pfizer (PFE -0.57%) named Eliquis each face patent expirations later this decade. While looming patent expirations on three drugs that account for approximately two-thirds of your company's total revenue sounds frightening, this is nothing new; it's just the nature of Bristol Myers Squibb's industry.

What matters most is that a company is proactive in developing and acquiring its next generation of blockbuster drugs to absorb key patent expirations. With more than 50 compounds in over 40 different disease areas currently in development at Bristol Myers Squibb, this is exactly what the company has been doing for years now.

As a result, analysts are projecting that Bristol Myers Squibb will be able to generate 6% annual earnings growth through the next five years. 

Yield-hungry investors can buy Bristol Myers Squibb's market-crushing 3.5% yield at a ridiculously cheap forward P/E ratio of 7.9, which is what makes the stock a buy for those looking to hedge against inflation

3. AbbVie

Finally, a Buffett stock that'd also be a good fit for income investors is AbbVie (ABBV 0.45%). Berkshire currently holds about $1.9 billion worth of AbbVie stock.     

It's well known at this point that the biopharmaceutical's top-selling drug in the world, Humira, will be facing intense biosimilar competition in the U.S. beginning in 2023. Even though the immunology drug's U.S. sales made up 31% of AbbVie's $41.24 billion total year-to-date sales, the company's pipeline should be able to stabilize and grow its net revenue beyond 2023.

AbbVie has 54 compounds in various stages of clinical trials, which is why analysts are forecasting that the stock will grow its adjusted EPS 4.5% annually in the next five years.

AbbVie's massive 4.4% dividend yield can be picked up at a forward P/E ratio of only 9.3. This is an attractive valuation for a stock with the ability to fight off inflation with healthy dividend hikes.

Kody Kester owns AbbVie, Bristol Myers Squibb, Johnson & Johnson, and Pfizer. The Motley Fool owns and recommends Berkshire Hathaway (B shares) and Bristol Myers Squibb. The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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