Dividend investors have long turned to pharmaceutical stocks because of their healthy payouts and attractive dividend yields. But are those dividends sustainable, or will investors get a nasty surprise from falling quarterly distributions in the future?
In the following video, Dan Caplinger, The Motley Fool's director of investment planning and author of the special free report "Everything You Need to Know About Obamacare," and Motley Fool health-care bureau chief Max Macaluso discuss that question and try to resolve investors' uncertainty about drug-stock dividends. Dan begins by observing that in general, pharma stocks with successful blockbuster drugs have huge amounts of cash flow that they can pay to shareholders, producing yields in the 3% to 5% range.
But as Max and Dan both note, different companies have different future prospects. AbbVie's (NYSE:ABBV) 3.3% yield looks healthy now, but much of it relies on the success of Humira, which will lose patent protection in 2016. Similarly, Eli Lilly (NYSE:LLY) has already lost protection on Zyprexa and Humalog, and it will also see patents on Cymbalta expire soon, forcing the company to take some cost-cutting measures to leave it better able to withstand tough times ahead. AstraZeneca (NYSE:AZN) faces the similar challenge of past or imminent losses of patents on Seroquel, Nexium, and Cresta.
Dan and Max note, though, that companies with solid pipelines should be fine. Merck (NYSE:MRK) has lost the benefit of Singulair's exclusivity, but Januvia has stepped up as a blockbuster drug in its own right. GlaxoSmithKline (NYSE:GSK) also has a strong set of drugs in development that should help it deal with its patent expirations. Dan concludes that the key for investors is to look beyond yields to focus on future prospects to determine whether dividend payouts are sustainable.
Neither Fool contributor Dan Caplinger, Max Macaluso, Ph.D., nor The Motley Fool has a position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.