Dividend stocks are powerful long-term investing vehicles that should be an integral part of a well balanced portfolio. Picking good dividend stocks, though, is another story altogether. High dividend yields may be an artificial by-product of a poorly performing stock, reflecting weakness in the company's underlying business. By the same token, lower yields can arise when a stock rises rapidly over a short period of time. In short, there is a lot to consider when choosing a dividend stock for your portfolio.
AbbVie (NYSE:ABBV) and Pfizer (NYSE:PFE) are two healthcare companies that garner significant interest from income investors because of their documented histories of increasing dividend payments over time, their strong cash flows, and their top-notch management teams. Even so, these two companies are currently in drastically different stages of their respective life cycles. As such, one company may be a much better long-term buy right now than the other. With this in mind, here is a deeper look at whether AbbVie or Pfizer is the better overall dividend stock.
AbbVie's revenue is rising, and its dividend increasing
On the back of strong and growing sales of its flagship anti-inflammatory drug Humira, AbbVie announced in the third-quarter that the company would increase its dividend by 17%, from $0.42 to $0.49 per share, starting in 2015. At current levels, this dividend increase translates into a yield of 3.07%, easily topping the sector average of 2.4%. As an added bonus, management upped its share buyback program by $5 billion, giving investors ample reasons to dig deeper into this top biopharma stock.
Most importantly, though, AbbVie is expected to continue growing its earnings in a significant way due to both Humira and the launch of its hepatitis C treatment next year. Experts presently have AbbVie's diluted EPS increasing by a noteworthy 27% in 2015, meaning that further dividend increases could be coming down the pike.
The main risks associated with this growth stock are Humira's looming patent expiration in 2016 and fierce competition in the hepatitis C market. AbbVie's management briefly touched on these two keystone issues in their third-quarter conference call, but only time will tell if they are truly able to mitigate these major risks going forward.
Pfizer might be a top health care name, but it isn't a top dividend stock
Unlike AbbVie, Pfizer's revenues have been trending downwards lately, falling 2% in the third quarter compared to a year ago due to the loss of exclusivity for former star drugs like Lipitor . The company also hasn't increased its dividend in five consecutive quarters. That said, Pfizer does offer a monstrous yield of 3.42%, making it one of the highest in the healthcare sector, especially among drugmakers.
On the bright side, management announced a massive $11 billion addition to its share repurchase program in the third-quarter. Pfizer could thus buy back over $12 billion of its own shares in the coming months, which should help to stabilize its share price as earnings continue to move south.
Pfizer's wild card moving forward is the possibility of either a break-up or a major deal that helps to restart its stalled growth engine. After its failed attempt to take over AstraZeneca (NYSE:AZN) earlier this year and new treasury rules making tax inversion less tempting, my bet is on a break-up. The new treasury rules would also probably mean Pfizer would have to cut its dividend to execute a large buyout, given that the company can't use its ex-U.S. assets in certain kinds of deals.
AbbVie therefore looks like the hands down winner in this comparison, and a good prospect to consider adding to your dividend portfolio. Pfizer, on the other hand, looks like its sheer size is its biggest problem. The effects of newer drugs are getting watered down on the top-line because of falling revenue from legacy products, and their diverse pipeline doesn't harbor enough blockbuster candidates to right the ship, so to speak. So I wouldn't strongly consider Pfizer's monster dividend until the path forward has been made clear by management, something they have yet to do.
George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.