Berkshire Hathaway (BRK.A -0.43%) (BRK.B -0.81%) CEO Warren Buffett is widely considered as one of the greatest investors of all time. One of Buffett's keys to success -- and a core lesson learned from his mentor Benjamin Graham -- has been to invest with a so-called "margin of safety." This concept centers on the idea of buying stocks trading a substantial discount relative to their intrinsic value.
While the intrinsic value of a stock means different things to different investors, one of the common themes across the galaxy of definitions for this time-tested investing concept is to focus on companies with strong free cash flows, a solid balance sheet, and a growing dividend program. By taking this approach, investors can essentially ignore the inherent volatility in the market from year to year and simply let the company's strong fundamentals do the heavy lifting, so to speak.
Which Berkshire Hathaway holdings -- a.k.a. Warren Buffett stocks -- are the best buys during this particularly volatile market? Dividend-paying pharma stocks AbbVie (ABBV -0.93%) and Bristol Myers Squibb (BMY -0.28%) are both outstanding buys for any type of investor right now. Here's why.
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AbbVie: A high-yield, high-growth biopharma
AbbVie is an oddball of sorts. Despite the looming U.S. patent expiration for its top drug Humira in 2023 and the ongoing bear market in biopharma stocks in general, AbbVie's stock has produced total returns (including the dividend) on capital of a healthy 28.7% over the prior 12 months. Investors have bid this top biopharma stock up for a couple of reasons. On the margin-of-safety side of things, AbbVie sports an above average annualized yield of 4.15% at current levels. Its shares are also trading at less than 9 times forward-looking earnings, which is a bargain-basement valuation for a large-cap biopharma.
On the growth front, the drugmaker's top line is projected to continue to rise in the low to mid-single digits over the next three years, despite Humira's upcoming battle with the patent cliff. By 2025, though, AbbVie expects its top-line growth to ramp up in a significant way, thanks to the strength of its five core business segments in aesthetics, eye care, hematologic oncology, immunology, and neuroscience. Specifically, a parade of newer drugs such as the autoimmune-disease medications Rinvoq and Skyrizi, as well as the novel cancer treatment Venclexta, are forecast to push the biopharma's annual sales to all-time highs in the second half of the decade. AbbVie's shares thus appear to be trading at a steep discount right now, relative to the company's longer-term prospects.
All told, AbbVie is a safe bet in an uncertain market.
Bristol: An undervalued dividend play
Bristol's shares have essentially broken even from a total return standpoint over the prior 12-month period. Investors have been less enthusiastic about this big pharma stock than AbbVie because the company is set to go through a major portfolio churn later this decade. Bristol's top three selling medications -- cancer drug Revlimid, blood thinner Eliquis, and immuno-oncology superstar Opdivo -- are all slated to lose patent protection before 2030. This patent cliff risk, however, is arguably being overblown by this moody market.
The key reason is that Bristol expects to generate between $10 billion to $13 billion in new product sales by 2025, according to the company's recent J.P. Morgan Healthcare conference presentation. What's more, the drugmaker has one of the deepest and most robust clinical pipelines, with more than 50 early-stage candidates under development right now. Bristol is also likely to add a few key revenue generating products through bolt-on acquisitions in 2022 and 2023. Long story short, Bristol has the pieces in place to overcome this spate of patent expirations, and future business development deals should ensure that its top line continues to head higher over the long term.
On the dividend front, Bristol's stock offers a juicy 3.34% yield at present. That's slightly above average for its major drug manufacturing peer group. Moreover, the drugmaker's shares are also trading at a paltry 7.15 times forward-looking earnings right now. Bristol's stock thus offer potential investors an attractive mix of better than average levels of passive income and a rock-bottom valuation.
