Healthcare offers plenty of great picks for dividend-oriented investors. And the choices aren't just limited to big pharma stocks. Gilead Sciences (NASDAQ:GILD), for example, is one of the relatively few biotechs that pays a dividend. Meanwhile, Teva Pharmaceutical Industries (NYSE:TEVA) stands out with one of the best dividend yields among generic-drug makers. Which of these two dividend stocks is the smarter choice? Let's take a look.
By the numbers
When it comes to yield, Teva takes the prize. The company's forward dividend yield currently stands at 2.09% compared to Gilead's 1.59% yield. Slam dunk? Not so fast.
Yield is only one number that dividend investors should evaluate. Another important number to consider is the payout ratio -- the percentage of earnings that a company pays out in dividends. In general, the lower the payout ratio, the greater the likelihood that payment of dividends continues and even increases in the future.
On this front, Gilead easily wins with a super-low 4.54% dividend payout ratio. Teva claims a respectable payout ratio of 45.67%, but it's obviously much higher than Gilead's.
Investors also should look at the history of companies in paying dividends. A track record of consistent dividend payouts -- and, even better, consistent increases of dividends -- counts as a big plus. Which contender has history on its side? Teva. Over the past decade, the company's dividend more than quadrupled. Gilead started paying dividends only this year.
Beyond the numbers
The critical element that these numbers don't reveal, however, is how strong a company's dividend will likely be down the road. While there's no crystal ball in investing, examining the business fundamentals of the companies helps a lot in predicting future dividend strength.
Gilead continues to deliver stellar earnings growth, thanks largely to its hepatitis C drugs Harvoni and Sovaldi. The two drugs combined for 58% of Gilead's total revenue in the third quarter. That's good and bad, though. Selling $4.8 billion worth of a couple of drugs in a single quarter is certainly nice. However, it's a little scary for so much of the biotech's revenue and earnings to ride on just two drugs.
Competitive pressures also pose a risk for Gilead. The payer community isn't happy about the high prices for Harvoni and Sovaldi and has pushed back on reimbursements. A rival hep C drug from Merck could be on the market in the relatively near future. Merck filed for regulatory approval of its grazoprevir/elbasvir combo in May. There's a real possibility that, if the regimen wins approval, Merck could kick off a price war that hurts Gilead's earnings -- potentially diminishing the chance of higher dividends from the biotech.
Teva, on the other hand, hasn't exactly wowed investors lately. Third-quarter revenue and earnings decreased year over year. One key problem that Teva faces is replacing declining sales for multiple sclerosis drug Copaxone now that there's a generic rival on the market. The company also has seen revenue drop off for three of its top generic drugs -- budesonide, niacin ER, and capecitabine.
Despite these hurdles, Teva's acquisition activity should help. The company has made a couple of big purchases that improve its pipeline and position it well in the Latin American market.
Which company's fundamentals look better? I'd definitely go with Gilead Sciences. Even with the potential Merck threat, the biotech should have no problems continuing to pay dividends at current levels and could easily raise the dividend in the future. Teva's dividend doesn't appear to be in danger. However, dividend hikes seem less likely with the challenges that the drugmaker faces.
Teva is the better choice for dividend investors right now. The company's dividend yield is higher and its payout ratio doesn't hint at any problems with dividend payments in the near term.
Over the longer run, though, I suspect that Gilead will prove to be the more attractive dividend stock. It wouldn't be surprising to me at all if the biotech's dividend yield eclipses Teva's yield within the next few years.
Keep in mind that we're talking only about dividends, though. Share-price growth is another matter altogether. If you're looking for a stock that pays dividends and has great growth potential, my view is that Gilead is the better pick. Your investing perspective makes a difference in which stock is the better fit for you.
Keith Speights owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences. 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.