Search as you may, but there are scant investment possibilities in the health care sector when it comes to high-yielding stocks appropriate for retirement. The only option over 5% is currently PDL BioPharma (PDLI) at 7.1%. While it’s definitely an enticing yield, it comes with a whole slew of concerns that you won’t get investing in something like GlaxoSmithKline (GSK), which yields more than 4% annually. Sure, you’re not going to hit a home run with your capital, but you won’t be facing the prospect of almost your entire licensing royalties disappearing at the end of 2014.
PDLI needs to replace the royalty revenue it’s losing from Roche (RHHBY) and Biogen (BIIB). Thus, it’s gone a buying binge in search of new licenses it can purchase and then farm out to bigger firms like Merck (MRK), which sold $1.6 billion of Janumet (Type 2 diabetes) in 2012.
Currently, PDL’s free cash flow for the trailing 12 months is $251 million, for a FCF payout ratio of just 36%. That’s the kind of payout ratio income investors should be shooting for. Unfortunately, the ratio comes with an expiration date 14 months out … which places a great deal of pressure on its future deals. If PDL BioPharma doesn’t do enough by the end of next year, its management will simply wind down the business.
I’m not a pharma expert, so I don’t know the likelihood of that happening. Nor do I understand the industry well enough to know with certainty that the next 14 months will lead to a successful transition. But I do know there are safer yield options in the health care sector — and unless you can afford to speculate with your retirement account, I’d stay away from its enticing yield. It could be gone with a flip of the switch.