Dividend stocks are a pivotal part of a balanced portfolio because they provide income and can help to lower the average purchase price of shares over time through dividend reinvestment plans.
Picking the right dividend stocks that offer stable payouts and growth can be a tricky endeavor, however.
Teva Pharmaceutical Industries (NYSE:TEVA) is a core holding in a number of high-profile funds because the stock offers a decent 2.27% yield and looks fundamentally undervalued on multiple fronts. Given that Teva shares have risen close to 40% in the last year, and that its top-selling multiple sclerosis drug Copaxone is running into patent problems, I think now is a good time to consider whether this stock is still worth adding to your portfolio.
With that in mind, let's look at Teva's valuation in relation to other companies in the specialty and generic drug industry.
Are Teva shares attractively priced?
Despite this stock's strong run, its share price looks undervalued compared to its peers. For example, Teva shares are trading at only 2.4 times 12-month trailing revenue, compared to six times for Actavis (NYSE:AGN).
And Teva's second-closest competitor in the generic drug space -- Mylan (NASDAQ:MYL) -- makes both of these stocks looks cheap, with shares trading close to 29 times trailing revenue. Overall, Teva looks cheap at current levels when compared to its chief rivals.
What are the potential pitfalls of buying at these levels?
It's no secret that Teva's main threat right now is the coming launch of generic versions of Copaxone. Management has suggested that full-year earnings per share could fall to $4.50, down $0.60 from the top of the company's prior guidance range. If generics do make this much of an impact on Copaxone sales, it would translate into a 10.1% drop in full-year EPS compared to the preceding year.
While Wall Street has been slightly more optimistic, with an average estimate of $4.92 for full-year EPS, these projections still represent negative growth for the year.
The uncertainty in these estimates stems from questions on how well Teva's double-dose formulation of Copaxone will perform and if the company can successfully fend off generic rivals for this "three times weekly" version of the drug. My take is that Teva has the inside track due to its long history of serving multiple sclerosis patients, and should therefore be able to switch a large percentage of patients over to this higher dosage-version of Copaxone -- compared to patients simply moving to the cheaper generic. In sum, I am cautiously optimistic that Teva will eke out positive EPS growth this year.
Teva shares have dropped nearly 10% this quarter and are trading well below their 52-week high, helping to create the compelling valuation discussed above. The problem is that we won't have any hard data on the impact of generics on the company's top and bottom lines until third-quarter earnings. And it will be longer still until we have a good feel for just how successful Teva has been at switching patients over to the higher-dosage formulation of Copaxone.
As such, I think Teva's shares in the near term will struggle to push higher under the weight of all this uncertainty. You might want to wait until there is a clear sign that the company's stated plan to combat these generic launches is panning out before taking a position.
George Budwell has no position in any stocks mentioned. The Motley Fool recommends Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.