Change is exciting, and it comes with risks. This is why turnaround stocks are so interesting. Right now, Teva Pharmaceutical Industries (TEVA +1.06%) is a turnaround story that may appeal to investors. But if you like dividends, you'll probably prefer this drug competitor and its lofty 6.3% yield. Here's why.
An easy dividend win
Teva doesn't currently pay a dividend, so it is hard for it to compete with any company that does if income is a key investment goal. That said, the S&P 500 index has a 1.1% yield today. The average pharmaceutical stock yields around 1.7%. And then there are drug giants like Pfizer (PFE +1.38%), which has a yield of 6.3%. But a high yield alone isn't enough to make a stock worth buying.
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In Pfizer's case, the yield is high for some pretty good reasons. For starters, the company has some key patent expirations on the horizon. When blockbuster drugs lose patent protection, their sales generally fall dramatically. On top of that, Pfizer has suffered a notable setback in its new drug development efforts in the GLP-1 weight loss space. It isn't just far behind the industry leaders in this emerging drug niche; it isn't even in the game yet.
Meanwhile, the payout ratio is currently above 100%, suggesting some risk of the dividend being cut.
Pfizer is proving it can survive
So Pfizer is also in a bit of a turnaround, but there's a notable difference. Teva's turnaround involves shifting its business to include both generics and new, internally created drugs. That is a massive model shift and dramatically increases risk. Pfizer is just dealing with the normal cycle of the pharmaceutical business. And it has proven time and time again that it can survive and thrive even in the face of near-term headwinds.
NYSE: PFE
Key Data Points
For example, after its own GLP-1 drug failed, it quickly bought a company with an exciting GLP-1 drug candidate. Moreover, the company has recently stated that it intends to maintain the dividend at its current level while it works through what are, in reality, just normal industry issues. There are also other drug opportunities it is working on in areas like migraines and oncology.
If you are a turnaround investor, Pfizer could be the perfect fit for your portfolio. And a better choice than Teva if you also have a deep love of dividends. It isn't that Teva is a bad company, but the business overhaul it is undertaking is a much bigger challenge than the normal industry headwinds Pfizer is dealing with right now.
