Dividend stocks, on balance, tend to deliver market-beating returns on capital over the long haul. The key reason is that regular dividend payments amplify returns through the power of compounding.
Selecting dividend stocks is no easy task, however. There are multiple factors to consider prior to buying one of the market's most coveted equities. Not only is it important to factor in a stock's annualized yield, but investors should always keep in mind a company's ability to maintain or grow its dividend over a long period of time.
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Dividend-paying pharma stocks Eli Lilly (LLY -1.24%) and Novo Nordisk (NVO -1.21%) are prime examples. Over the past couple of years, these two names have delivered market-crushing returns on capital. Specifically, Lilly and Novo's shares have generated total returns on capital (including dividends) over the prior 24 months of 77% and 72%, respectively. Even so, these two red-hot pharma equities sport drastically different prospects as pure-play dividend vehicles. Armed with this insight, let's break down which of these popular healthcare stocks is the better income play right now.
The case for Eli Lilly
Lilly's share price has been surging due to the excitement over its experimental Alzheimer's disease candidate donanemab, as well as the potential for its type 2 diabetes medication Mounjaro to win a weight-loss label expansion from the Food and Drug Administration (FDA) later this year.
As things stand right now, Lilly sports four main franchises: diabetes, neuroscience, oncology, and immunology. Among these segments, diabetes is by far the most important commercially speaking. In the first quarter of the year, for instance, diabetes drug sales accounted for over 60% of total net sales. Over time, though, Lilly's revenue concentration risk should flatten out as its robust oncology pipeline bears additional fruit and it expands into the high-value obesity care and Alzheimer's disease markets.
In the past five years, Lilly has boosted its dividend by an impressive 88%. Still, the drugmaker's current annualized yield of 1.06% is well below the average within its big pharma peer group (2.51%), as well as among S&P 500 listed stocks (average yield of 1.66%). Nonetheless, Lilly's dividend is well supported by earnings, given its modest 64.7% trailing-12-month payout ratio. Perhaps most importantly, Lilly should have no trouble extending its recent tradition of regular annual increases to its dividend with a multitude of upcoming drug launches.
The case for Novo Nordisk
Novo's bull run has been powered by its glucagon-like peptide-1 (GLP-1) franchise centering around the type 2 diabetes and obesity medication semaglutide. In the first quarter of 2023, GLP-1 sales accounted for 50% of net sales. More broadly, Novo's type 2 diabetes and obesity drugs, which include other medications such as its various types of insulins and weight loss drug Saxenda, comprised a hefty 91.4% of total net sales for the three-month period.
The Danish drugmaker thus sports a fairly sizable revenue concentration risk. Novo has been able to successfully defend its share of the type 2 diabetes and weight loss markets so far, but novel competitors should always be considered a viable threat. These particular pharmaceutical markets are two of the most intense areas of industry-wide research and development spending, after all.
Over the past five years, Novo has grown its dividend by approximately 33%. At current levels, the drugmaker offers a below-average annualized yield of 1.08%. However, its dividend program is well supported by annual earnings, evinced by its trailing-12-month payout ratio of 45.7%. So, barring a marked drop in earnings power due to the entrance of a potent new competitor in either type 2 diabetes or obesity care, Novo's dividend should be viewed as a safe long-term bet.
Verdict
Thanks to its more diverse product portfolio and bevy of upcoming drug launches, Lilly stands out as the more attractive dividend stock in this head-to-head matchup. While Novo isn't exactly a risky stock due to its proven ability to ward off would-be competitors, the company's high level of revenue concentration in the type 2 diabetes and weight loss markets is a concern. Lilly, on the other hand, has several growth drivers to lean on in the event something unforeseen happens.
