A high dividend yield and powerful growth prospects are a rare combination for any single stock to offer.
On one hand, a high yield often comes with the trade-off of an elevated dividend payout ratio and lower resulting growth potential. That's because higher payout ratios tend to imply that a company's growth opportunities are limited. Otherwise it would be retaining capital rather than distributing it to shareholders. On the other hand, a company with adequate growth opportunities will generally have a lower payout ratio to retain the capital needed for growth. This results in a lower dividend yield.
Here are two pharmaceutical companies that can give investors the best of both worlds: Generous dividend income and great growth potential to boot.
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1. Sanofi: Great growth prospects at a cheap valuation
With a $119 billion market capitalization, Sanofi (SNY 2.58%) is the 10th-biggest drugmaker in the world by market cap. The company's most recognized and commercially successful product is its star immunology drug Dupixent, co-owned with Regeneron. After its revenue split with the latter, Sanofi took in nearly $9 billion in revenue from the product in 2022. For context, that was up 43.8% over the year-ago period. Given that Dupixent has gained numerous regulatory approvals in recent months, this double-digit top-line growth is unlikely to end anytime soon.
As you would expect for a large-cap pharmaceutical company, Sanofi is a balanced business. Dupixent accounted for just over 19% of the company's total sales last year, with the remaining sales coming from two blockbuster (at least $1 billion in sales) vaccine franchises and six blockbuster medicines.
Along with a product pipeline of more than 80 projects in clinical development, like its respiratory syncytial virus vaccine candidate, the future is bright for Sanofi. Analysts believe the company's earnings will compound at 12.3% each year through the next five years. Putting this into perspective, that is almost double the drug manufacturer industry's average earnings growth projection of 7%.
As if this red-hot growth profile wasn't enough, Sanofi's 4% dividend yield crushes the S&P 500 Index's 1.7% yield. Better yet, the forward dividend payout ratio of just under 40% implies that the dividend is quite safe. Topping it all off, the stock is trading at a dirt-cheap forward price-to-earnings (P/E) ratio of 9.4. That's well below the drug manufacturer industry's average forward P/E ratio of 12.8, which makes Sanofi stock a compelling buy within the pharmaceutical industry at the current $48 share price.
2. Amgen: A tremendous dividend growth stock
Amgen's (AMGN 1.75%) $123 billion market capitalization positions it as the ninth-largest pharmaceutical company on the planet. Like Sanofi, the California-based drugmaker boasts an impressive product portfolio. Led by the immunology drug Enbrel and the osteoporosis medicine Prolia, Amgen's portfolio had nine blockbuster products in 2022.
This is why analysts believe the company will deliver mid-single-digit annual earnings growth over the medium term. With several dozen compounds currently in different stages of clinical development across a variety of therapeutic areas, Amgen's future in the years ahead should be an upbeat one. The company's biosimilar for AbbVie's Humira in the U.S., Amjevita, could create nearly $1 billion in new annual revenue for it within the next few years.
Aside from Amgen's promising fundamentals, the stock yields a generous 3.7%. Considering that the dividend payout ratio is poised to come in below 48% in 2023, this payout should keep rising. Best of all, the stock's forward P/E ratio of 12.4 is slightly less than the drug manufacturer industry's average forward P/E ratio of 12.8. This modest valuation provides a solid entry point for dividend growth investors.
