Income investing can be a profitable strategy during market downturns, including the one we all witnessed in 2022. This is because investors often flock to what are viewed as safer stocks amid market volatility.
Due to the dependable nature of the pharmaceutical industry, it's not surprising that many stocks in this industry outperformed the S&P 500. Here are two stocks that beat the index in 2022 and could run it back in 2023.
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1. Pfizer: A world-class business at a dirt-cheap valuation
Pfizer (PFE -3.85%) got a lot of attention in the past couple of years for its portfolio of COVID-19 products, including its vaccine Comirnaty (co-developed alongside BioNTech (BNTX -1.57%)) and the anti-viral treatment Paxlovid. This isn't surprising, given that these two products are expected to account for the majority (55.6%) of the $100.8 billion in revenue the company projected for 2022.
But investors would be mistaken to believe that Pfizer is a one-trick pony that just stumbled upon a lucrative COVID-19 franchise. Outside of its COVID-19 products, the company has six other medicines, and its Prevnar pneumococcal pneumonia franchise, that will each bring in at least $1 billion in revenue for 2022.
This diversified portfolio is the result of a balanced product pipeline. Pfizer's pipeline consists of more than 100 projects currently in different stages of clinical development. It is projected that COVID-19 products revenue will dip in 2023 and beyond. But due to the deep pipeline, analysts anticipate the company will deliver 0.8% annual non-GAAP (adjusted) diluted earnings per share (EPS) growth over the next five years.
Stacked against the S&P 500 index's average 1.7% dividend yield, investors will appreciate Pfizer's market-topping 3.3% dividend yield. And with the dividend payout ratio set to come in below 25% in 2022, there is plenty of room for dividend growth in the years to come.
After an outsized 67% surge in Pfizer's share price in 2021, the stock fell 10% in 2022. But this was much better than the S&P 500 index's 27% gain in 2021 and 19.4% loss in 2022.
A cheap valuation seals the deal to make Pfizer a compelling buy. The stock's forward price-to-earnings (P/E) ratio of 10.5 is meaningfully below the S&P 500 pharmaceutical industry average forward P/E ratio of 14.9. This is why I believe Pfizer stock will continue to outpace the market going forward.
2. Novartis: An income stock you can trust
The beauty of Novartis (NVS 0.72%) is that there's nothing flashy about the company, but it gets the job done. The company's product portfolio consists of dozens of medicines, and 14 of these products will surpass $1 billion in net sales in 2022. Its top two therapies, the immunology drug Cosentyx and the heart failure drug Entresto, will each fall just short of mega-blockbuster status for 2022 ($5 billion-plus in annual sales).
As if this diverse product portfolio wasn't enough, Novartis has nearly 150 projects in its pipeline currently in clinical development. Coupled with the strong existing product portfolio, this is why analysts are forecasting the company will generate 3.9% annual earnings growth through the next five years.
Novartis' 3.6% dividend yield compares quite favorably to the S&P 500 index. With the dividend payout ratio poised to come in below 50% over the next 12 months, the payout is quite safe.
Thanks to its stability as a company, Novartis' stock gained 8% in 2022. Since the forward P/E ratio of 14.4 is just below the S&P 500 pharmaceutical industry average of 14.9, there's reason to believe further upside could lie ahead in 2023.
