Pharmaceutical companies have a recession-proof business model. The simple reason behind this fact is that people do not choose when they get sick. So, for example, the pharmaceutical industry was largely unaffected by the devastating 2008 global recession. In fact, earnings per share among the industry's biggest names actually tracked higher, on balance, during that exceptionally bleak economic period.
The ability of pharmaceutical companies to shrug off economic downturns is one big reason investors often flock to them during bear markets. Not only do large-cap pharma companies offer shareholders a respite from marketwide volatility, but they also generally come with top-shelf dividend programs. Blue chip pharma stocks tend to be stellar passive income vehicles in any market environment.
Image Source: Getty Images.
Pharma stocks do have one serious drawback, however. The expiration of key patents for top-selling medications can act as a major drag on earnings over extended periods of time. Companies do try to soften the impacts of patent expirations via organic pipeline development and business development activities. But the fact remains that aging legacy medications can dampen earnings power, and subsequently threaten the sustainability of a company's dividend program.
Which large-cap U.S. pharma stock is the best dividend play right now? To answer this question, let's check out how these companies stack up across several key metrics.
Comparison of dividend-paying U.S. pharma stocks
In order to make an apples-to-apples comparison, this analysis is being restricted to the eight largest U.S.-based pharma companies. This way, investors can directly compare yields without having to consider foreign tax issues.
So here is a quantitative breakdown of the most recent stock valuations and dividend programs of AbbVie (ABBV 1.06%), Amgen (AMGN 2.35%), Bristol Myers Squibb (BMY 1.30%), Eli Lilly (LLY -2.63%), Johnson & Johnson (JNJ 1.49%), Gilead Sciences (GILD 0.91%), Pfizer (PFE 2.40%), and Merck (MRK 0.44%).
| Company | Forward P/E Ratio | P/S Ratio | Dividend Yield | Payout Ratio | 2024 Revenue Growth (estimated) |
|---|---|---|---|---|---|
| AbbVie | 13.2 | 4.58 | 3.91% | 85% | 0.3% |
| Amgen | 13 | 4.81 | 3.54% | 64% | 4.9% |
| Bristol Myers Squibb | 8.81 | 3.29 | 3.21% | 74% | 2.3% |
| Eli Lilly | 37.5 | 10.8 | 1.38% | 59% | 19.1% |
| Johnson & Johnson | 15 | 4.44 | 2.82% | 66% | 2.6% |
| Gilead Sciences | 12.2 | 3.86 | 3.54% | 80% | 1.9% |
| Pfizer | 12.5 | 2.45 | 3.8% | 29.2% | 2.1% |
| Merck | 14.4 | 4.57 | 2.67% | 49% | 6% |
| Average | 15.8 | 4.85 | 3.1% | 63.3% | 4.9% |
Data provided by Morningstar. P/E = price to earnings. P/S = price to sales.
This pharma titan edges out its closest peer
All things considered, Pfizer is arguably the best of the bunch as a pure dividend play. It offers the second-highest yield behind AbbVie, its shares are among the cheapest in the group from both a forward-earnings and price-to-sales ratio perspective, and it sports the lowest trailing payout ratio by a wide margin. That said, the pharma titan's near-term growth prospects are rather modest as a result of its declining COVID-19 franchise.
Amgen, though, does come in a close second in this comparison. Amgen's shares sport an above-average yield, an attractive valuation by the forward-earnings metric, respectable revenue growth prospects in 2024, as well as a reasonable payout ratio for a top pharma stock. Income investors may want to also consider this elite pharma stock.
Lastly, Merck isn't all that far behind Pfizer and Amgen. The drugmaker's stock doesn't sport much of a premium at current levels, it has a better-than-average top-line outlook, and its payout ratio is well below the group average. The one knock against Merck is that its yield isn't nearly as high as the leaders in the group.
All told, Pfizer stands out as the overall best dividend stock in big pharma. But Amgen and Merck are also attractive income investments for the reasons mentioned above.
