Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out the previous selection.
This week, we'll turn our attention to a global pharmaceutical giant that's managed to crawl back from the patent cliff with a vengeance, GlaxoSmithKline (NYSE:GSK), and see why it could be the perfect remedy for income seekers looking for dose of growth and income.
The past couple of years have marked a drastic transition period for big pharmaceutical companies that have seen their pipelines decimated by patent expirations and generic-drug makers waiting in the wings to pounce one those once lucrative drugs.
Eli Lilly (NYSE:LLY), for instance, could be in the worst shape of any large pharmaceutical company with The New York Times forecasting that three-quarters of its pipeline will be at risk of generic competition between 2010 and 2017. These fears have been compounded for Lilly shareholders of late by numerous late-stage pipeline flops.
Another prime example would be Forest Laboratories (UNKNOWN:FRX.DL), which lost patent protection on depression drug Lexapro in March 2012 and is set to lose patent protection on Alzheimer's drug Namenda in less than two years. In 2011, these drugs combined for more than three-quarters of Forest Labs' revenue. Luckily for Forest, its collaborative efforts have led to a bounty of newly approved drugs which are helping stem the generic downslide.
GlaxoSmithKline, too, isn't without its patent concerns. Its best-selling drug, Seretide, which you probably known better as Advair for the long-term maintenance of asthma, came off patent in 2011, but because the inhaled compound is so complex, and the Food and Drug Administration hadn't laid out specific clinical ground rules on what it'd look for in a generic version of the drug, no biosimilar has made it to market as of yet. However, in September, the FDA released a seven-page document detailing what it'd need to see to approve a generic version of the drug meaning Advair's days as a multibillion-dollar drug are likely numbered by 2016 or 2017.
Glaxo has also witnessed a recent pipeline disappointment along with development partner Prosensa (NASDAQ: RNA). Drisapersen was expected to be a revolutionary treatment for Duchenne muscular dystrophy sufferers, but it failed to show any meaningful improvement over the placebo in a large late-stage trial.
The GlaxoSmithKline advantage
Get ready to hit the "duh" button, but the two factors that stand out that are placing GlaxoSmithKline among pharma's most elite companies are its diverse and largely successful pipeline development, and its numerous collaborative efforts.
The easiest way to stem the tide of an impending patent cliff is to have an active and successful pipeline. In recent years, GlaxoSmithKline's success rate has been among the best in the industry. This year, it and collaborative partner Theravance (UNKNOWN:THRX.DL) saw two of its four COPD-based inhaled compounds be approved by the FDA for long-term COPD maintenance -- Breo Ellipta and Anoro Ellipta. Anoro Ellipta has peak sales potential of roughly $1.4 billion, while Breo Ellipta is projected to bring $1.3 billion in the United States. If this trend of success continues with Theravance, then it'll have long replaced Advair's lost revenue by the time 2017 rolls around.
GlaxoSmithKline also brought to market two monotherapy treatments for unresectable and advanced melanoma, Mekinist and Tafinlar, as well as the companion diagnostic test which detects the specific mutations that these two therapies target. Combined these two drugs have peak sales potential ranging from $1.4 billion to $2 billion in the United States.
Collaborations are another cornerstone to GlaxoSmithKline's success. In addition to its valuable partnership with Theravance above, Glaxo has undertaken collaborative studies with antibody-drug conjugate specialist Seattle Genetics (NASDAQ:SGEN) in the therapeutic area of cancer. ADC's offer a unique pathway of destroying cancer cells by piggybacking a toxin onto an antibody and only releasing that toxin when it comes into contact with the signature protein from a cancer cell, so there's clearly a lot of promise here.
Show me the money, GlaxoSmithKline
However, one of the primary draws of GlaxoSmithKline is its inflation-topping dividend, which is funded by its diverse branded drug portfolio. Although branded drugs often have a patent protection period once they reach market of around a decade or less, during that decade they return upwards of 70% or even 80% gross margins thanks to a lack of generic competition. The end result is pretty consistent cash flow for Glaxo and a healthy dividend:
As you'll note, Glaxo pays a varying dividend quarter to quarter, so you won't find multi-year dividend increase streaks here. Although your stipend can actually fall from one year to the next, Glaxo's payout has improved by 76% over the past 10 years and currently stands at a 4.7% yield, well above anything you'll find from the U.S. Treasury or your local credit union!
Sometimes the best dividends really are those which are right under our nose in the form of big pharmaceuticals. With a growing product portfolio, a booming pipeline, and multiple collaborations under its belt, there's no reason to believe this nearly 5% yield can't continue to produce impressive results for shareholders and income seekers.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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