Sound investing is built on the practice of buying stock in companies whose products will become more in demand as years progress. Given the growing burden of chronic diseases, it's forecasted that the global pharmaceutical industry will compound at a 7% rate annually from $1.2 trillion in 2019 to $2.2 trillion by 2027.
The promising outlook for the pharmaceutical industry bodes well for the highest quality pharma stocks. Let's take a look at three top-notch biotech stocks that appear to combine strong fundamentals with cheap valuations.
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1. Johnson & Johnson
Johnson & Johnson (JNJ -0.69%) is arguably the standard upon which healthcare companies are measured. Why do I make this claim?
J&J boasts 59 consecutive years of dividend increases, making it a Dividend King with just 30 other stocks. If this weren't impressive enough, the company's track record of boosting its payout is the longest in all of healthcare. And it likely won't be relinquishing its crown as a Dividend King anytime soon for several reasons.
First, J&J's dividend payout ratio last year was 42.8%. This gives the company adequate capital to reinvest into its business to drive future earnings growth.
Second, J&J enjoys a flawless AAA credit rating. It joins tech giants Apple (AAPL 1.27%) and Microsoft (MSFT 0.37%) as the only healthcare company with a perfect credit rating. Even though J&J's dividend is comfortably covered by earnings, this adds another layer of security to the payout. That's because J&J could lean on its immaculate balance sheet to pay dividends if it were to encounter a period of reduced profitability.
Third, analysts expect 6.4% annual non-GAAP (adjusted) earnings per share (EPS) growth over the next five years. J&J should be able to hand out 6% to 7% dividend increases for the foreseeable future while also maintaining its low payout ratio. What's behind analysts' estimates for solid earnings growth?
In addition to its blockbusters currently on the market like immunology drugs Stelara and Tremfya and oncology drug Darzalex, J&J currently has a deep late-stage pipeline. This includes more than 40 indications in phase 2 or phase 3 clinical trials, which should lead to at least a few blockbusters.
J&J's 2.6% dividend yield can be picked up at a price-to-earnings (P/E) ratio of only 15.6, which makes it an especially great buy for income investors.
2. Amgen
The second biotech stock to consider buying right now is Amgen (AMGN -0.19%). While Amgen only began paying a dividend in 2011, the stock has raised its dividend for 11 years straight. This puts it in a group of stocks that have raised their dividends for at least 10 years, called Dividend Contenders.
Like J&J, Amgen's dividend growth streak will also probably continue well into the future due to a couple of reasons.
Amgen's dividend payout ratio last year was 41.2%. This strikes a balance between returning capital to shareholders and retaining earnings to grow the business.
Next, Amgen has 40 compounds at different phases of clinical development across various therapeutic areas like oncology, inflammation, and bone. Amgen's pipeline of drugs should more than offset any patent expirations in the coming years. That explains why analysts predict Amgen will generate 7% annual earnings growth in the next five years.
Investors looking for yield can lock in Amgen's 3.5% dividend yield at a current year P/E ratio of 12.7, which is a reasonable value for a must-own dividend stock.
3. Pfizer
The third biotech stock to think about purchasing now is the revolutionary COVID-19 company Pfizer (PFE -0.19%). Pfizer's antiviral pill Paxlovid and blockbuster COVID-19 vaccine that was developed alongside BioNTech (BNTX -0.45%) will almost certainly be robust growth drivers in the near term.
But the even more encouraging takeaway from Pfizer's 2021 was that its non-COVID revenue grew 6% year over year to $44.4 billion. This was primarily due to nice growth in Pfizer's blockbuster drugs like the anticoagulant co-owned with Bristol Myers Squibb (BMY -0.27%) called Eliquis, as well as the rare heart disease drugs Vyndaqel/Vyndamax.
Pfizer's enviable existing drug portfolio and 79 indications in clinical trials help to clarify why analysts are forecasting 10% annual earnings growth over the next five years. With a dividend payout ratio of just 35.3% last year, Pfizer should have plenty of room to grow the dividend in the future.
Investors looking for income and growth can snatch up Pfizer's 3.2% dividend yield at a forward P/E ratio of 9.6, which makes the stock a top pick for 2022.
