Income-seeking investors have some interesting options to choose from in the healthcare sector right now. AbbVie (ABBV -4.58%), the pharmaceutical giant behind the top-selling drug of the past decade, and Medical Properties Trust (MPW -1.10%), a real estate investment trust (REIT) that focuses on hospitals, both offer dividend yields that are way above average.
There are plenty of good reasons to buy both of these stocks. Unfortunately, there are also some serious risks to consider. Let's weigh the good news against the bad to see which of these stocks is the better buy right now.
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The case for AbbVie
AbbVie is a Dividend King that has raised its quarterly payout a whopping 288% since spinning off from Abbott Laboratories in 2013. Despite its amazing track record, the stock offers an eye-popping yield of 4.2% at recent prices.
Soaring sales of multiple new drugs make AbbVie look like a screaming buy. Skyrizi, a psoriasis injection that launched in 2019 is already generating more than $8.5 billion in annualized sales. Rinvoq, a tablet for rheumatoid arthritis, ulcerative colitis, and Crohn's disease that also launched in 2019, is on pace to generate $4.5 billion in annual sales.
AbbVie's lucrative drug sales generated $24.7 billion in free cash flow over the past year. It only needed 42% of this sum to meet its dividend obligation which leaves heaps of cash to invest in new drugs.
Flush with cash, AbbVie recently announced two major acquisitions in the space of a week. It will pay $10.1 billion for Immunogen, a company with an already approved cancer therapy called Elehare. The big pharma will also acquire Cerevel Therapeutics, a clinical-stage drugmaker developing a treatment for schizophrenia, for around $8.7 billion.
AbbVie's recent investments in neuroscience and oncology seem relatively likely to pay off well for investors. The company's neuroscience lineup already includes three blockbusters with over $1 billion in annual sales. AbbVie's track record in oncology is equally impressive. In 2015, it boldly invested $21 billion in rights to Imbruvica shortly before it became the first chemotherapy-free treatment option for the most commonly diagnosed form of leukemia.
The case for Medical Properties Trust
Medical Properties Trust is a REIT that owns 441 properties, mostly hospitals and acute care facilities in the U.S. and abroad. This particular REIT employs net leases that transfer all the variable costs of building ownership to its tenants. The leases and loans on this REIT's books don't mature for 16.7 years on average, so cash flows ought to be highly reliable.
In the third quarter, Medical Properties Trust reported normalized funds from operations, a proxy for earnings used to evaluate REITs, that reached $0.38 per share. This should be more than enough to fund a dividend currently set at just $0.15 per share.
At recent prices, Medical Properties Trust offers a huge 12.6% dividend yield.
The bad news
Dividend yields for REITs generally don't run into double digits unless there's concern about their ability to meet their commitments in the quarters ahead. Medical Properties Trust's stock price has fallen more than 65% over the past year because several of its hospital operating tenants have had trouble making ends meet and it had to slash its dividend.
Medical Properties Trust reported adequate FFO to cover its dividend in the third quarter but it's also selling properties left and right to increase liquidity. Investors with a high tolerance for risk could come out miles ahead with this stock but there are no guarantees. For most investors, it's probably best to keep a safe distance from this troubled REIT until it's in a position to expand its portfolio again.
Shares of AbbVie are under pressure because the market is worried about biosimilar competition for AbbVie's top-selling drug, Humira, which began in the U.S. this year. Third-quarter sales of Humira in the U.S. fell 39% year over year to an annualized $12 billion.
The better buy
Sinking Humira sales give AbbVie a big hole to fill but the company's well prepared to meet the challenge. Skyrizi and Rinvoq appear more than capable of offsetting Humira losses on their own and these aren't the only growth drivers in its new product lineup.
Medical Property Trust's huge dividend yield is tempting but it won't help you retire any sooner if the REIT has to trim its payout again shortly after you buy the stock. Unless you have a huge tolerance for risk, AbbVie looks like the better buy right now.
