Safe Dividend Stocks for the Next Market Crash: Teva Pharmaceutical (TEVA)
TEVA Dividend Yield: 4%
5-year Annual Dividend Growth Rate: 8.2%
Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) is the world’s largest generic drug maker, thus giving it a great long-term growth runway since over time (as patents expire) more and more of global drug sales are moving in that direction.
And because it’s a pharmaceutical company, one of the most hated sectors right now (driven by uncertainty over changes in federal healthcare policy), Teva’s shares look cheap; down 43% in the past year to yield more than 4%.
Of course that’s also due to a rash of bad news recently, including a failed attempt on the company’s part to extend patents on its multiple sclerosis drug, Copaxone.
Copaxone is the most important product in the company’s specialty drug segment, which contributes $8 billion, or 36% of the company’s sales, but a majority of its profits. Thus the coming generic competition for Copaxone is likely to result in short-term growth headwinds.
Then again, Teva has a great track record of steadily growing through acquisitions — such as Allergan’s (NYSE:AGN) generic drug business — as well as drug innovation. Teva’s drug pipeline has $4 billion a year in annual sales potential. In addition, its vertical integration and economies of scale allow it to convert modest sales growth (3.6% CAGR over the past five years) into strong growth in free cash flow (11.8% CAGR over the past five years).
So even though the medium-term patent expiration cliff it’s facing means that sales are likely to be flat, with long-term sales growth of 2% to 3% CAGR, Teva’s dividend should benefit from several factors. Specifically, rising margins — and 1% to 2% annual share buybacks — could drive EPS growth of 5% to 7%, and with a low FCF payout ratio of 36%, that can easily allow sustainable dividend growth of 6% to 7%.