Dividend stocks are the foundation on which some of the greatest retirement portfolios are built. However, this success only arises from finding businesses that are capable of growing or maintaining their payout over time.
According to three of our Foolish analysts, there are three healthcare stocks whose dividends could be in big trouble. Are these dividend-paying healthcare stocks headed for disaster? You'll have to be the judge!
Big Pharma is usually a stomping ground for some of the market's best dividends. Because pharmaceutical companies are usually rife with innovative products and their margins and cash flow are often robust, they're able to reward their shareholders with a dividend that typically tops that of the S&P 500 average (which is about 2%). Unfortunately, not all healthcare dividends are safe.
U.K.-based pharma giant GlaxoSmithKline (NYSE:GSK) has been regularly paying a yield in excess of 4% or 5% for years thanks to the great success of its respiratory platform and inhaled COPD/asthma therapy, Advair. The bad news for GlaxoSmithKline and shareholders, though, is that Advair has long since lost its patent protection. The only reason Advair continues to sell well (global sales topped $6 billion in 2014 and peaked at $8 billion) is that it took the Food and Drug Administration years to lay out the guidelines of what a copycat biosimilar of Advair would have to meet in order to be approved. With competition expected to enter the market in 2016, Glaxo's best-selling drug could be readying to lose billions in sales.
On the other end of the spectrum, Glaxo's next-generation COPD/asthma therapies haven't been selling as well as expected. Based on its most recent quarterly report, Breo Ellipta is pacing only around $250 million in full-year sales despite almost two full years on the market. GlaxoSmithKline has struggled with insurer coverage and could wind up needing to discount its COPD/asthma therapies at the sake of its margins just to get the needle moving.
All told, I believe Glaxo's payout ratio will rocket well above 100% in 2017 and 2018, necessitating a reduction in the company's dividend.
As Sean points out, pharma stocks often carry high dividends, but the highest-yielding stocks often gain their status from weakness in the stock prices due to concerns about future prospects. AstraZeneca (NYSE:AZN) is one such stock, with the company already having lost two major drug successes to patent expirations and a third on the way next year.
The U.K.-based pharma company built its reputation on well-known treatments for a variety of conditions, including bipolar-disorder fighter Seroquel and acid-reflux drug Nexium. Yet both of those treatments now face generic competition, and AstraZeneca's sales and earnings are both taking a hit as a result. Even worse, further erosion will likely come next year, when cholesterol treatment Crestor joins the patent-expiration list.
To counteract the impact of the patent cliff, AstraZeneca has made strong forays into immuno-oncology, cardiovascular, and metabolic diseases. The problem, though, is that developing drugs is expensive, and without blockbusters to replace the huge amounts of revenue that Seroquel, Nexium, and Crestor bring in, AstraZeneca's cash flow will take a big hit. Indeed, the drugmaker has already kept its dividend unchanged for years after a long history of consistent payout increases. In time, any failure to get high-revenue drugs through its pipeline could easily necessitate a dividend cut from AstraZeneca.
It's not just Big Pharma companies that have dividends that could be in danger. Healthcare information systems vendor Quality Systems (NASDAQ:NXGN) claims a 4.3% dividend yield that might be on shaky ground. Quality Systems is currently paying out 56% more in dividends than it makes in earnings. That can't continue indefinitely -- especially considering that the company has only $130 million or so in cash.
The good news is that Quality Systems experienced strong year-over-year earnings growth last quarter and could reap some benefits from healthcare providers looking for systems to support the coming diagnosis coding change known as ICD-10. The bad news is that the gravy train for vendors like Quality Systems from federal financial incentives for physicians and others to implement electronic health record systems dries up in 2016.
Quality Systems might not slash its dividend payments outright, though. The company could keep dividends at the current level while it works to boost earnings. Regardless, the days of yields over 4% appear at risk of coming to an end.