Investors looking for stocks that can deliver heaps of passive income might want to turn their heads toward the healthcare sector. Right now, there are a couple of beaten-down stocks offering above-average dividend yields.
After falling a long way over the past 12 months, shares of Pfizer (PFE +1.65%) offer a 6.1% dividend yield at recent prices. Walgreens Boots Alliance (WBA +0.00%) still owns America's largest chain of retail pharmacies but its stock price has fallen hard in recent months. Shares of the pharmacy chain operator have been offering a 4.7% dividend yield.
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These stocks offer enticing yields now, but they won't help you retire comfortably if their underlying businesses can't produce growing profits.
Here's a closer look at both healthcare giants to gauge their ability to maintain and raise their dividend payouts in the years ahead.
Walgreens Boots Alliance
Walgreens Boots Alliance operates America's largest chain of retail pharmacies. At last count, there were about 9,000 retail locations across America plus a few thousand abroad.
NASDAQ: WBA
Key Data Points
Being America's largest chain of retail pharmacies isn't as much of an advantage as it used to be. In January, the company ended a 47-year streak of annual dividend payout raises by slashing its quarterly payout by 48% to $0.25 per share.
Shares of Walgreens are down about 79% from the all-time high they reached in 2015. On the surface, Walgreens' 4.7% dividend yield seems attractive now that the average dividend-paying stock in the benchmark S&P 500 index offers a 1.38% yield.
During Walgreens' fiscal 2024, which ends on Aug. 31, management expects adjusted earnings to land in a range between $3.20 and $3.50 per share. That's more than enough to meet a dividend commitment currently set at just $1.00 per share annually.
While its reduced dividend is well-funded now, significant growth in the years ahead could be a challenge. Walgreens does not own a pharmacy benefits management (PBM) business, but its lead competitor in the retail pharmacy space, CVS Health, does. In a nutshell, PBMs decide which drugs our health plans cover and how much they cost.
For several years now, Walgreens has been building out a U.S. healthcare services segment, but it's still losing money. The segment posted a $1.7 billion operating loss during the 12 months that ended last August, then lost another $436 million during the three months that ended last November. I'd avoid Walgreens stock until the company shows investors it can execute an acquisition of a vertically integrated healthcare business.
Pfizer
Pfizer spun off its collection of post-market-exclusivity drugs in 2020, so these days, it's fully focused on selling and developing new medicines. The stock is down mainly because its COVID-19 product sales evaporated faster than expected.
NYSE: PFE
Key Data Points
Investors will be glad to learn that revenue excluding sales of its COVID-19 products grew 7% in 2023, and significant gains could be up ahead.
Sales of Pfizer's COVID-19 products fell faster than expected, but not before the company reinvested a great deal of the profits they generated. Last December, Pfizer acquired Seagen, a cancer drug developer that's expected to contribute $3.1 billion in revenue to Pfizer's top line this year.
Pfizer's dividend has risen 61.5% over the past decade, and investors can reasonably expect several more years of dividend growth. Management expects Seagen's revenue contribution to reach $10 billion by 2030.
Pfizer's confidence in Seagen's growth story is partly due to the Food and Drug Administration's approval of Padcev, a Seagen therapy, last December. Now, it's part of a chemo-free treatment option for newly diagnosed bladder cancer patients.
Pfizer offers a higher dividend yield than Walgreens right now, and I'd argue that it's a much better stock to buy and hold over the long run. Management feels the acquisition of Seagen doubled the company's oncology research and resources overnight. With this in mind, we can be fairly confident that Padcev won't be the only new blockbuster emerging from its pipeline in the years ahead.
Pfizer shares have been trading for just 12.4 times forward-looking earnings estimates, even though continued growth at a mid-single-digit percentage seems likely. Put it together, and the pharma stock looks like a screaming buy right now.
