The central bank expects the U.S. economy to enter a mild recession later this year. While the impact of an economic downturn on stocks is hard to predict, high-quality dividend stocks have a proven track record of delivering above market gains during turbulent periods.
Where should investors look for the best bargains within the dividend stock landscape? The healthcare sector stands out as an exemplary space to find companies with recession-proof revenue streams and rock-solid dividend programs. A fair number of top-shelf healthcare companies, after all, sport economically insensitive business models, stellar free cash flows, and robust balance sheets.
Here are two dividend-paying pharmaceutical stocks that ought to hold up well in a recessionary environment, are proven passive income vehicles, and trade at extremely attractive valuations.
1. Amgen
Amgen (AMGN -0.94%) is a global biotechnology company. Earlier this year, the company announced a 10% boost to its dividend payout, marking the 12th consecutive year of dividend raises for the biotech pioneer. With this latest increase, Amgen's annualized dividend yield presently stands at a handsome 3.55%.
Amgen's dividend program is well supported by its enormous free cash flows, fueled by a mix of legacy medicines such as the top-selling autoimmune drug Enbrel, along with a suite of newer growth products like the cholesterol-lowering therapy Repatha and the lung cancer medicine Lumakras. In the first quarter of 2023, the drugmaker generated a respectable $720 million in free cash flow.
On the valuation side, Amgen's shares trade at a forward-looking earnings yield of 7.4%. Based on this valuation metric, the biotech's shares screen as undervalued relative to both a risk-free asset such as a U.S. Treasury bill as well as other large-cap biotech companies (the average earnings yield within this group presently stands at 7%).
The one knock against Amgen is that it lacks a clear-cut flagship medication and its pipeline is devoid of a true all-star candidate like Eli Lilly's Mounjaro. That being said, the company's strength-by-numbers approach ought to lead to mid-single-digit revenue growth for the remainder of the decade. Amgen's stock, in turn, qualifies as a fairly safe bet for income-seeking investors.
2. Johnson & Johnson
Johnson & Johnson (JNJ -2.48%) is poised to become a leaner, more focused medtech and pharmaceutical company following the upcoming spinoff of its consumer healthcare unit Kenvue. What's more, this spinoff ought to unlock tremendous latent value for shareholders over the course the decade.
The key reason is that J&J's medtech and pharmaceutical units are expected to generate steady levels of revenue growth over this period, thanks to the company's heavy investment in both internal and external pipeline opportunities. Consumer healthcare, by contrast, has often acted as a drag on quarterly earnings, despite the unit being home to scores of iconic brands like Tylenol, Listerine, Motrin, and Neutrogena, among many others.
Another important factor is that pharmaceuticals and medical devices tend to be considerably less sensitive to downturns in the broader economy, compared to discretionary items like premium face washes and skin moisturizers. Shareholders, in turn, won't have to contend with the cyclical nature of consumer healthcare earnings once this spinoff is completed.
Historically speaking, J&J has generally been able to create free cash flows ranging from 13% to 20% of total sales. That's an impressive feat for a company with nearly $100 billion in annual sales. Post-split, Wall Street analysts expect the company to continue to generate healthy levels of free cash flows, which should support further increases to the dividend in the years ahead. As things stand now, J&J has raised its dividend for a whopping 61 consecutive years.
Equally as important, J&J's ability to produce substantial free cash flows should enable the company to engage in additional value-creating business development activities. Mergers and acquisitions, after all, will be an important component of the company's overall value proposition as it contends with patent expirations for top-selling drugs like immunology juggernaut Stelara.
On the valuation side, J&J's shares are trading at a forward-looking earnings yield of approximately 6.9%. That's roughly an average valuation for its large-cap healthcare peer group. Even so, J&J's stock is still significantly undervalued compared to risk-free assets like U.S. Treasury bills.
All told, J&J has proven its ability to deliver sustainable revenue growth and healthy levels of passive income, and to consistently ratchet up shareholder value throughout its lengthy operating history. So, if you're looking for an attractively priced dividend stock, J&J should definitely be on your radar right now.
