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AbbVie (ABBV -4.91%) has long been a favorite name among income-seeking investors because it's a Dividend Aristocrat that offers a substantial yield of 4.3% at current levels, combined with the fact that the company has grown its top line at industry-leading levels since being spun off from Abbott Laboratories in 2013. AbbVie's glory days, though, may be coming to an abrupt end.
Because of the forthcoming patent expiration for the drugmaker's top-selling anti-inflammatory medicine Humira, AbbVie has taken an aggressive approach to mergers and acquisitions that has helped bring its total outstanding debt to over $32 billion at last count. The company's near-relentless approach to maintaining a top-notch yield has also driven its trailing-12-month payout ratio to an untenable 111%.
High debt levels and a payout ratio in excess of 100% tend be a bad mix for dividend stocks. That's why investors may want to look to safer names in healthcare like Gilead Sciences (GILD 0.59%) and Pfizer (PFE 1.11%) moving forward.
Gilead Sciences is poised to ramp up its dividend payout
Gilead is relatively new to the dividend game, initiating its first payout in company history only last year. However, the blue chip biotech has already announced a 10% hike in its quarterly payout to $0.47 per share starting in the second quarter of 2016.
As Gilead is projected to generate over $31 billion in total revenue in 2016 and is sitting on a pile of cash and equivalents totaling $26 billion, the biotech certainly has the firepower to push its yield higher if management chooses to do so. After all, its payout ratio will still fall short of even 10% following this upcoming increase to the quarterly distribution.
The potential downside risk for income-seeking investors is Gilead's reported interest in pursing a high-dollar buyout of a revenue-generating company in order to bolster its top line. Unfortunately, such an acquisition may result in a reduction in the company's shareholder reward programs in the near term.
Having said that, Gilead isn't exactly known for breaking the bank when it comes to M&A, meaning that the biotech's growing dividend program is probably safe going forward.
Pfizer remains committed to its dividend as the Allergan merger looms large
Despite announcing a plan to merge with Botox-maker Allergan (AGN) in one of the largest deals in the history of the healthcare sector, Pfizer's management has repeatedly stated that it has no plans to reduce shareholder rewards in the near term. In fact, Pfizer recently announced a 7% increase to its quarterly payout starting in the first quarter of 2016.
Looking ahead, Pfizer's 4% yield at current levels appears to be safe even after this deal goes through sometime in the second half of 2016 for two reasons. The first key issue to understand is that Pfizer is actually going to lower its effective tax rate from around 24% to an estimated 15% once it moves to tax-friendly Ireland -- freeing up more cash for shareholder rewards in the process.
The other issue at play is that Pfizer has something along the lines of $50 billion in cash overseas. This mountain of cash should be more readily available to the drugmaker upon relocating to Ireland, meaning that it should have little problem supporting its current dividend and completing this megamerger with Allergan at the same time.
Are Gilead and Pfizer compelling buys right now?
I like both of these drugmakers at current levels. Gilead is presently trading at a highly compressed forward price-to-earnings ratio of 7.22, despite repeatedly proving its ability to fend off would-be competitors to its main revenue drivers. Pfizer, on the other hand, is set to create tremendous value for shareholders by merging with Allergan due to the latter's diverse portfolio of growth products like the constipation drug Linzess and the double-chin treatment Kybella -- along with the substantial tax benefits that are part and parcel of this merger.
