Many investors are increasingly looking to generate safe income from dividend stocks. In general, big blue-chip stocks tend to be consistently generous dividend payers. And biopharma companies — when they’re established enough to offer payouts — have traditionally been seen as relatively safe dividend investments. Therefore, today I’d like to discuss the outlook for three such stocks, namely GlaxoSmithKline (NYSE:GSK), AbbVie (NYSE:ABBV), and Johnson & Johnson (NYSE:JNJ).
Despite competitive pressures from other big pharma and biotech companies, GSK, ABBV, and JNJ stocks have strong balance sheets, proactive management and several important drugs in the pipeline that are likely to keep them ahead of the competition. Furthermore, all three companies offer healthy dividend yields that will provide strong support for their respective stock prices in the months ahead.
No investor has a crystal ball that can predict the markets’ next move with certainty, but with increased levels of volatility in broader markets, now could be an appropriate time to become a little defensive. Therefore, mega-cap healthcare stocks may be suit diversified portfolios.
However, investment risk and return go together, and any of these three biopharma stocks may suffer a setback later in 2019. In addition to potential company-specific issues, one industry concern is that the U.S. government may increase its drug pricing regulations.
Both President Trump and other politicians on both sides of the aisle have openly criticized healthcare companies for the ever growing prescription prices and the effect on Medicare budget. Therefore, if the U.S. political discourse turns against the sector more, these stocks may experience further volatility.
With all of that said, let’s take a closer look at these high-yield, discounted stocks to buy.
When short-term volatility increases in the broader markets, I look for companies that offer fundamental value and growth potential, as well as proven stability. Overall, GSK stock fits the criteria well.
Despite management’s efforts to boost the company’s financial strength, since 2014, GlaxoSmithKline shares have not done much for investors. Year-to-date, GSK stock is up 5.5%.
The lackluster performance of GSK shares was mostly because its pharmaceutical business lagged other big pharma rivals in offering blockbuster drugs. However, management has been focusing on developing strong assets for GSK’s pipeline. For example, the “immune system” space, which gives the company pricing power, is now getting a higher share of GlaxoSmithKline’s research and development (R&D) budget. The company is also a global leader in respiratory diseases.
Furthermore, I am excited about the late-2018 merger announcement between GSK and Pfizer (NYSE:PFE), which will create a leader in over-the-counter (OTC) products. The two companies will spinoff their consumer healthcare brands in a new venture of which GSK will own 68% and contribute with its top brands, including Theraflu, Sensodyne and Voltaren. I expect this new company to be a winner for the investors.
Over the past two years, the political discourse in the U.K. on Brexit has increased the volatility of British companies and their stock prices. Although a potential no-deal Brexit could affect GSK with a broader UK-wide market decline, I believe most of the bad news regarding Brexit is already baked into GSK share price.
Going forward, Brexit is not likely to have a major negative impact on GlaxoSmithKline’s business model or its stock price.
GSK’s latest earnings release on May 1 showed a strong balance sheet as the group reported better-than-expected Q1 2019 revenue. Earnings per share of 79 cents was 13 cents above consensus. Management also gave positive outlook for the rest of the year.
GSK’s main segments are:
- Diversified Biopharmaceuticals (about 3% of market share);
- Immune Deficiency Disorders (about 46% of market share); and
- Lower respiratory biopharmaceuticals (about 37% of market share).
GlaxoSmithKline’s global dominance in two of these segments ensures a higher degree of predictability in cash flow.
Analysts also welcomed the fact that sales of Shingrix, GSK’s fast-growing shingles vaccine, was up 61.5% from the previous quarter. Nucala, a respiratory drug, also showed 41% year-over-year (YoY) sales growth. Furthermore, GlaxoSmithKline has enjoyed solid growth in its influenza and meningitis vaccines. Analysts have strong performance expectation of the HIV newcomer Juluca.
Due to its rock-solid dividend, which stands at over 5.1%, and its robust growth potential, GSK stock belongs in any balanced portfolio of healthcare stocks. During the earnings call, CFO Iain MacKay reaffirmed the pharma giant’s projected dividend for 2019.
GSK stock may continue to trade sideways during the rest of 2019. However, patient GSK bulls will probably be proven right to believe in the management’s commitment to create shareholder value and to further grow the company. In the meantime, they can continue to collect high dividends.
AbbVie is a $115-billion-market-cap biopharma stock, but shares have been in a downtrend for almost a year, especially following the earnings report on April 25.
In 2013, Abbott Laboratories (NYSE:ABT) spun off its research-based pharmaceuticals business, creating AbbVie, an independent biopharmaceutical company. Abbott decided to retain the branded generic pharmaceuticals, diagnostics, medical devices and nutrition.
Meanwhile, AbbVie took control of the development and commercialization of a range of brands, including Humira, its flagship drug used to treat autoimmune diseases, Imbruvica, which differentiates between cancer cells and regular cells, and Synthroid, a replacement for a hormone normally produced by the thyroid gland. The company’s financials and growth metrics over the past five years have been impressive. During its short life since the spin off, AbbVie stock has delivered consistently growing revenues and free cash flows.
In other words, ABBV stock was in a strong financial position heading into 2019, with hopes of a higher share price during the first quarter. However, year-to-date, the share price is down 15%. This decline has been mostly due to the falling sales of Humira, the world’s bestselling drug that treats rheumatoid arthritis and Crohn’s disease.
International sales of Humira are falling as a result of ‘biosimilar’ competition in Europe, which makes up three-quarters of the overseas Humira business. In October 2018, its patent in the European Union expired.
The FDA refers to biosimilars as a drug that is “highly similar to an FDA-approved biological product … [that has] no clinically meaningful differences in terms of safety and effectiveness.”
Although Wall Street had already known about this sales decline in Europe, investors decided to not be exposed to the potential risk from the U.S. sales of Humira. In the U.S., AbbVie has patent protection for Humira through 2023.
Many analysts on Wall Street are concerned with the concentration risk that comes from getting such a high level of earnings from a single drug. But other analysts are optimistic that management will continue to grow earnings in double digits through different successful drugs in the pipeline, including Venclexta, Risankizumab and Orilissa.
It is important to emphasize that AbbVie’s revenue from the drug will not decline to nothing when the biosimilars hit the market in 2023. What will most likely happen is that as the company’s pricing power decreases, the revenue will also gradually decline.
Overall ABBV’s recent earnings release showed robust top-line growth, a strong pipeline of existing and new drugs. At present, AbbVie’s other major products include:
- AndroGel, a testosterone replacement therapy.
- Creon, a pancreatic enzyme therapy to treat exocrine pancreatic insufficiency.
- Duopa and Duodopa, gels to treat Parkinson’s disease.
- Viekira Pak, which treats chronic hepatitis C.
- Zinbryta, to treat multiple sclerosis.
Management has been increasing its R&D budget each year. Analysts are also expecting a slew of new products in 2020, such as next-generation immunology drugs. These drugs and others that are being developed and commercialized, highlight how impressive the potential growth story could materialize in the next few years.
In some news that just broke today, ABBV has finalized a deal to buy Allergan (NYSE:AGN) for $63 billion. AGN stockholders are elated — the stock is up a mindblowing 25%, but ABBV investors aren’t taking to the deal well. ABBV has plummeted 16% on the day.
Currently, the main calling card for AbbVie stock is its dividend, which stands at about 5.4%. Since its spinoff from Abbott Laboratories, ABBV has increased dividends every year — a trend that is likely to continue. Its next dividend payment is on Aug. 15. In other words, the short-term headwinds regarding the sales of Humira and the AGN merger are also creating long-term buying opportunities now. I’d personally view today’s movement as a discount.
Johnson & Johnson (JNJ)
With a market cap of $377 billion, Johnson & Johnson, the healthcare giant, is currently number 37 on the Fortune 500 list. The group builds its moat by investing heavily in its diverse pharmaceutical pipeline. JNJ operates in three segments that provide it with diversified sources of revenue, earnings and cash flow:
- Pharmaceutical (contributes more than 50% of JNJ’s pretax profits)
- Medical Devices & Diagnostics
JNJ’s pharmaceutical division provides treatments for immunology, cardiovascular and metabolic diseases, pulmonary hypertension, infectious diseases and cancer. The consumer section involves products in baby care, oral care, over-the-counter drugs, personal hygiene and women’s health. Several well-known brands within its consumer division include Aveeno, Band-Aid, Johnson’s Baby, Neutrogena, Rogaine, Tylenol and Zyrtec. JNJ’s medical devices segment develops and markets products and solutions for surgery, orthopedics and vision.
The pharamceutical and medical devices and diagnostics groups bring in about 80% of sales, contributing the majority of cash flows for the firm.
JNJ’s diversification enables the company to withstand economic cycles more effectively. No matter what the economy does, consumers will buy the products of many of these strong brands, and JNJ will have industry-leading market share in many areas. Geographically, the U.S. provides almost half of the revenue.
On April 16, the company reported better-than-expected Q1 results, as its sales increased to $20.02 billion. JNJ’s earnings per share rose 1.9% to $2.10. Its pharmaceutical business grew 7.9%. Similarly, its medical devices unit grew 4.3% and its consumer sales increased 0.7%. Finally, Johnson & Johnson raised its full-year guidance.
Year-to-date, JNJ stock is up 10%, and I remain bullish on the long-term outlook of Johnson & Johnson shares.
However, in the short-term, investors may take some profits in JNJ stock. As a result of the recent run-up in price, short-term technical indicators have become somewhat overextended. Investors who pay attention to short-term oscillators should note that Johnson & Johnson stock has also become “overbought.”
Therefore, JNJ stock might drop towards the $135 level, where the stock is likely to find major support in the coming weeks.
Finally, investors who buy Johnson & Johnson stock now will enjoy a dividend yield of 2.7%. The conglomerate has raised its dividend each year for over half a century. With its diverse range of products, I think JNJ is likely to continue to be a high-dividend staple stock. And dividends tend to create a “price floor” for stocks during market downturns.
As of this writing, Tezcan Gecgil holds covered calls on GSK (June 28 expiry).