It takes money to make money. And oftentimes, the stocks of companies that are making a lot of money are the ones that can make you the most money over the long term.
With this in mind, we asked three Motley Fool contributors to pick rock-solid stocks that they think are practically money machines. Here's why they chose AbbVie (ABBV -0.73%), Johnson & Johnson (JNJ 0.23%), and Pfizer (PFE -1.49%).
Rolling in cash is nothing new for AbbVie
David Jagielski (AbbVie): A business that makes a lot of money is one that will never run out of opportunities to grow. Building up a hefty cash balance can make it easy for a company to acquire another business or reinvest in itself, without having to raise cash and dilute existing shareholders.
AbbVie is an excellent example of a business that continues to bring in billions of dollars of money for itself. This year, the company projects that it will generate adjusted free cash flow of $24 billion. On AbbVie's most recent earnings call, management said the money would be used to pay down debt, invest in its pipeline, and support its growing dividend, which today yields around 4% -- well above the S&P 500 average of just 1.3%. In five years, the company has more than doubled its quarterly dividend payments.
Strong cash flow is, however, nothing new for AbbVie. This money-making machine has reported more than $10 billion in free cash since 2018.
AbbVie's cash flow has enabled the company to bolster its business. In 2019, it acquired Allergan for $63 billion in a cash-and-stock deal. The acquisition will help the company offset the impact from the loss of U.S. patent protection in 2023 for its top-selling drug, Humira, which generated $20.7 billion in sales last year.
Having tons of cash to work with can solve problems. That's why despite the concerns investors may have about Humira, AbbVie should be in great shape and make for an attractive long-term investment.
A dividend you can take to the bank
Prosper Junior Bakiny (Johnson & Johnson): Generating healthy amounts of cash is important for pharmaceutical companies for the same reasons it is important for other corporations. Among many other things, doing so allows them to invest in the future. Johnson & Johnson is excellent in this regard, having generated nearly $20 billion in free cash flow in 2021, about the same amount it racked up in 2020.
Last year, the healthcare giant also poured $14.7 billion in its research and development (R&D) initiatives, representing a 21% year-over-year increase and an all-time high for the company. Johnson & Johnson currently boasts 53 programs in its late-stage pipeline alone. The company routinely adds new indications to existing drugs -- or earns approvals for brand new products.
In the fourth quarter of 2021, Johnson & Johnson scored about half a dozen regulatory approvals. All of that starts with shrewd R&D spending. Of course, Johnson & Johnson is also in the habit of rewarding shareholders through dividend increases. The company belongs to the exclusive group of Dividend Kings, companies that have raised their dividend payouts for at least 50 consecutive years.
Johnson & Johnson currently offers a dividend yield of 2.51%, well above the S&P 500's average of 1.27%. Moreover, the company boasts a conservative cash payout ratio of 48.5%, giving it plenty of room for more dividend increases. That's great news for investors.
It's also worth noting that Johnson & Johnson is undergoing a bit of a transformation. The company is shedding its consumer health division. Johnson & Johnson hopes to complete this transaction in 2023.
The new-look Johnson & Johnson will likely record faster top-line growth rates since its consumer health segment was the slowest growing of its three business segments. It will also decrease exposure to hundreds of lawsuits related to some products within its consumer health business.
With a long and storied history, strong cash flow generation, and an excellent dividend record, investors can't go wrong with this excellent healthcare stock.
In a league of its own
Keith Speights (Pfizer): I totally agree with David and Prosper about the tremendous financial strength offered by AbbVie and Johnson & Johnson. However, I think that Pfizer ranks as a money-making machine that's in a league of its own -- at least among healthcare companies.
Pfizer's revenue and adjusted earnings nearly doubled in 2021. The company projects that its revenue this year could top $100 billion for the first time in its history with guidance of between $98 billion and $102 billion.
My view is that Pfizer will make a lot more money than its outlook indicates. Its revenue guidance includes $22 billion for COVID-19 pill Paxlovid. That's an impressive total considering that the drug only recently entered the market.
But Pfizer CEO Albert Bourla acknowledged in the company's fourth-quarter conference call that "the numbers could become way bigger than what we have right now" for Paxlovid. Pfizer's estimate included only supply deals that have already been signed or aren't yet signed but have agreed-upon prices and volumes. The company will almost certainly finalize additional supply agreements for Paxlovid in 2022.
Pfizer continues to use its robust cash flow to fund its dividend program. The company's dividend currently yields nearly 3.3%. Chief business innovation officer Aamir Malik said in the Q4 call that Pfizer would use its cash flow and the strength of its balance sheet to grow its dividend even more. Malik also said the company will invest in business development.
Thanks in part to acquisitions and collaborations, Pfizer believes that it will continue to deliver solid top-line growth at least through 2030. Its stock doesn't seem to reflect those prospects with shares trading at only 8.7 times expected earnings. Pfizer appears to be a great opportunity for long-term investors looking for a combination of growth, income, and value.