You can look at lots of business metrics. What ultimately matters most, though, is the ability of a company to generate cash.
With this in mind, three Motley Fool contributors were asked to pick stocks to buy right now that are cash cows. Here's why they chose AbbVie (ABBV -2.04%), Gilead Sciences (GILD 0.76%), and Vertex Pharmaceuticals (VRTX 1.25%).
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A reliable dividend payer
Prosper Junior Bakiny (AbbVie): There are many ways in which a company can be deemed a "cash cow." Paying regular dividends is one of them. And in that department, pharma giant AbbVie is an excellent stock to consider.
Let's look at some of the facts. Since splitting from its former parent company, Abbott Laboratories, AbbVie has increased its dividends by 270%. AbbVie is also a member of the exclusive group of Dividend Kings. Factoring in Abbott's track record, the company has increased its dividend payouts for 51 consecutive years.
That's an impressive, but investors are more interested in the future. Can AbbVie continue to reward shareholders with increasing dividends even as its own biggest cash cow, rheumatoid arthritis drug Humira, lost U.S. patent exclusivity this year? Patent cliffs are par for the course for drugmakers. AbbVie planned ahead, though. The rest of the company's immunology lineup will pick up the slack, even as AbbVie's revenue initially declines.
AbbVie's product lineup is more diversified than ever. In addition to its immunology focus, the company is also active in oncology, neuroscience, eye disease, and aesthetics. The sheer breadth and diversity of AbbVie's portfolio is a strength, especially as it is more than capable of earning new approvals regularly. AbbVie expects roughly 10 approvals or regulatory submissions this year. There will be many more going forward.
Even with the end of the Humira era, AbbVie can continue delivering solid and increasing revenue and earnings. That's the most important thing if the company is to continue rewarding shareholders with payout increases. And with its solid dividend profile and a very conservative cash payout ratio of 41%, AbbVie remains a top pick for investors looking for a cash cow, be it for passive income or otherwise.
Plenty of cash to pay dividends and fund growth
David Jagielski (Gilead Sciences): A company that's flush with cash is one that will always have growth opportunities to pursue. Gilead Sciences fits that category as the company routinely generates operating profits and brings in free cash flow to not only support its dividend, but also to help grow its business.
Last year, it brought in $8.3 billion in free cash flow, which was down from $10.8 billion the previous year. The company pays out less than $4 billion in dividends on an annual basis, so there's plenty left over after paying shareholders a generous 3.5% yield to invest money back into the business.
That cash can help the business expand as Gilead has 59 clinical-stage programs in its pipeline. In oncology alone, there are dozens of trials ongoing that could help further diversify the company's operations.
Currently, Gilead's business centers around its HIV treatments, which accounted for 63% of the $27.3 billion in revenue it reported last year. By diversifying its product mix and strengthening its pipeline, the business will make for a better long-term investment.
The company already has some exciting growth catalysts in the works with its breast cancer drug Trodelvy obtaining approval from the U.S. Food and Drug Administration (FDA) to treat patients with an advanced form of breast cancer (HR-positive/HER-negative). It's the drug's third indication. Analysts project it can bring in $955 million in sales this year (up from $680 million in 2022).
Gilead also obtained FDA approval last year for Sunlenca, a twice-yearly injectable for people with multi-drug-resistant HIV. At its peak, the therapy could bring in up to $1.5 billion in annual revenue. Trodelvy, by comparison, could hit a peak of $2 billion in sales.
Gilead has promising growth potential. Even more growth could be on the way depending on how the company uses the tremendous cash flow that it's generating. For long-term investors, I think Gilead is an excellent stock to buy and hold.
Monopoly money
Keith Speights (Vertex Pharmaceuticals): Vertex Pharmaceuticals generated free cash flow of over $3.9 billion in 2022. It ended the year with a cash stockpile of $10.8 billion, including cash, cash equivalents, and marketable securities, up from $7.5 billion at the end of 2021.
The big biotech is a bona fide cash cow because of its cystic fibrosis (CF) franchise. Vertex markets the only four approved therapies that treat the underlying cause of this rare genetic disease. A handful of other companies are developing CF drugs, but none have advanced past phase 2 clinical testing yet. This gives Vertex a secure monopoly for at least several more years.
But CF isn't Vertex's only game. The company's pipeline features eight programs in mid- or late-stage development. CEO Reshma Kewalramani noted in the company's latest quarterly update that Vertex hopes to launch new therapies target five disease areas within the next five years, with each representing a multibillion-dollar market opportunity.
Vertex probably won't have to wait very long for the first of those anticipated launches. The company, along with its partner, CRISPR Therapeutics, could secure regulatory approvals as soon as later this year for exa-cel in treating two rare blood disorders: sickle cell disease and beta-thalassemia. If all goes well, Vertex could soon churn out even more cash than it already does.
