The Case for Pfizer
Pfizer is equally attractive for long-term, low-risk investors seeking yield. Despite its stronger long-term growth rate, Pfizer has a forward P/E of about 10.3 now — the lowest of any pick on this list of Big Pharma stocks.
The charts also look good. InvestorPlace chief technical analyst Sam Collins recently pointed to a technical breakout in Pfizer back on July 17, and again on July 30. That resulted in a new 52-week high for stocks, but since then shares have rolled back a bit and might present an entry point for new investors.
Of course, Pfizer has its challenges now that Lipitor is off patent. The company still is squeezing out bigger profits, but admittedly cost-cutting is fueling the growth. It’s also worth noting that some of the previous stability came from a shrewd 2009 acquisition of Wyeth that bolstered sales and operating margins. Without another big buyout, there is the risk of nothing else to step in and fill the void.
Then there are obvious pipeline risks and a lack of future money-makers. PFE admittedly has struggled to get a new major drug approved, but I like the track record of Pfizer, as well as its 3.7% yield.
The Other Pharma Stocks
To be clear, there isn’t a dramatic difference between these stocks, so you don’t have to jump based on my gut feeling alone. Do your own research and consider any one of these big pharma giants because of the long-term demographic trends supporting sales and the recession-proof nature of health care.
Merck could be a good turnaround play. Merck has the worst long-term performance of this group, as MRK stock languished in 2010 and 2011. The company even posted a quarterly loss thanks to charges relating to its Schering-Plough merger. But in the past two months, shares have soared almost 17% thanks to strong earnings and news that its experimental osteoporosis drug odanacatib is faring well in studies. It also helps that gains from cost-cutting (including 13,000 layoffs) are starting to take hold. There’s also emerging markets to look forward to, considering that in the latest quarter about 18% of MRK’s revenues came from these markets. If you can look past some of the bad headlines in 2010 and 2011, this stock might be up-and-coming in Big Pharma.
Johnson & Johnson also faces a colored history, including numerous safety and recall issues. But new CEO Alex Gorsky is looking to return to this company’s roots with a focus on quality and the customer. With a big suite of consumer products that include Band-Aids and Tylenol, this could give JNJ an edge as a consumer staples play as much as a pharma company.
However you slice it, you probably should have one or two big pharma stocks in your portfolio if you’re a buy-and-hold dividend investor. The yields are nice, the sector is strong and demographic trends are in your favor.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.