The pharmaceutical industry can be especially lucrative for investors. Drugmakers sell medicines on patents lasting longer than a decade and are critical to the well-being of patients, which builds in a great deal of pricing power.
But investors also need to be careful when selecting pharmaceutical stocks, too. When major patents expire and competition enters the mix, businesses can suffer greatly if they aren't prepared.
Here are two giant drugmakers for income investors to consider buying this month that look equipped to continue thriving in the future.
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1. J&J: Healthcare's undisputed champion of dividend growth
When many people think of Johnson & Johnson (JNJ 0.10%), the first thing that comes to mind is consumer health brands under the separate, but 90% company-owned entity, Kenvue (NYSE: KVUE). These brands include Listerine mouthwash, Neutrogena skin care products, and Tylenol.
But most of J&J's sales are driven by the pharmaceutical segment, and to a lesser extent the medtech segment (which sells medical devices and surgical systems and instruments). On the pharmaceutical side of business, the company sells a COVID-19 vaccine and 13 medicines that are each poised to surpass $1 billion in annual revenue in 2023.
Thanks to the remarkable diversity of its business, J&J has been able to deliver dividend growth to its shareholders for 60 consecutive years, making it the longest-reigning Dividend King in healthcare. For context, this dividend growth streak is nine years longer than the next-best streaks by Becton, Dickinson (NYSE: BDX), AbbVie (NYSE: ABBV), and Abbott Laboratories (NYSE: ABT).
And J&J is arguably well-positioned to hand out more dividend increases to shareholders in the years to come. For one, the company had 92 projects in different stages of clinical trials and 10 in the registration phase of development as of April 18.
Analysts expect the one-two punch of a strong product portfolio and pipeline to help J&J generate 4.3% annual earnings growth for the next five years. Plus, the company's low dividend payout ratio builds in a buffer for it to grow its payout even through temporary downturns in its business.
Passive income-oriented investors can buy the stock and its 2.9% dividend yield (versus the S&P 500 index's 1.5% yield) for a forward price-to-earnings (P/E) ratio of just 15.3. Put into perspective, that mirrors the pharmaceuticals industry average of 15.3.
2. Merck: A powerhouse within oncology
An aging global population and better diagnostic tools are each contributing to more cancer diagnoses. That has led pharmaceutical companies to dedicate more resources to cancer research, and it explains the noteworthy growth forecast for the global cancer drug market. The industry is anticipated to nearly double from $112.7 billion in sales in 2019 to $215.1 billion by 2030.
As a leading oncology medicine company, Merck (MRK -1.20%) is ideally positioned to cash in on this major trend within healthcare. And the drugmaker doesn't just sell the top cancer therapy in the world, marketed as Keytruda. Merck's cancer portfolio also consists of Lynparza, Lenvima, and Reblozyl -- all produced in partnership with other big pharma companies.
With over 110 programs in late-stage clinical trials and more than 10 programs under review by global regulatory agencies, Merck's outlook appears bright. Analysts forecast that its earnings will compound at an annual rate of 8.2% over the next five years.
What's more, the company has a dividend payout ratio set to come in at a low-40% clip for 2023, making the stock's 2.5% dividend yield reasonably safe. Investors can scoop up Merck's shares at a forward P/E ratio of 16.4, which isn't an excessive valuation for its solid growth prospects.
