2022 has not exactly been the best year for investors. The S&P 500 index (NYSEARCA: VOO) has lost 20% of its value this year, inflation is at a 40-year high, and the Federal Reserve predicts a recession in the coming year or two. Things are pretty bleak, but that doesn’t mean there are no investment opportunities. Whatever the economic conditions, there will be strong demand for products like pharmaceuticals.
When pharmaceutical companies introduce a new drug, they patent it, which allows them to generate monopoly profits for years to come, making them great cash cows in all climates. In saying this, which three pharmaceutical stocks should investors look at to diversify their portfolio?
Out of the three companies listed in this article, Pfizer Inc. (NYSE: PFE) is the largest and only one to experience a negative year-to-date return. This is likely due to the company lowering its full-year earnings forecast from $6.35-$6.55 to $6.25-$6.45. However, it has 333 consecutive quarters of dividend payments and 12 years of dividend increases. This makes it an attractive stock for investors looking for cash returns.
Pfizer is also investing heavily in research and development, with a total expense of $2.3 billion in the first quarter of 2022, and a full-year expenditure forecast raised to $11-$12 billion. This expenditure has resulted in a pipeline of 19 projects that could be future cash generators. Pfizer was ranked first in the 11th annual Pharmaceutical Innovation and Invention Index and first in what Forbes refers to as “total R&D productivity over 20 years”. These awards show the level of talent that Pfizer has attracted, giving it a more competitive edge over its rivals. However, research and development is expensive and often yields little to no results.
AbbVie Inc. (NYSE: ABBV) has a diversified portfolio of products spread across immunology, aesthetics, oncology, neuroscience, and eye care. Like Pfizer, AbbVie is a consistent dividend payer, with 50 years of dividend increases. Between fiscal 2013 and 2021, the company’s dividend per share increased by 325% to $5.20. While dividend payments grew in 2022, so did the company’s outstanding shares, which reduced the dividend per share to $4.23.
AbbVie’s revenue has experienced strong growth since 2018, with an increase of 71%, while, net income increased by 202.6% over the same period. This growth has made the company’s dividend payments sustainable while also providing the company with cash and equivalents of roughly $6.098 billion. This can be used for expansion during the coming higher interest rate environment. Earlier this year, the company completed the acquisition of IPR&D and Milestones, costing 1.1% of net revenues, thereby reducing earnings per share (EPS) by $0.08.
AbbVie’s research and development spending in Q1 2022 was about $1 billion lower than Pfizer’s and experienced a year-over-year (YoY) decline of 10%. This is not a good sign as the majority of the firm’s profits generally come from patented products. Lower R&D spending likely means that when these patents expire, there will be fewer new products to replace them, thereby lowering profits.
Merck & Co., Inc.
Unlike Pfizer and AbbVie, Merck & Co., Inc (NYSE: MRK) also has an animal health division, which in Q1 2022, represented just under 10% of the company’s worldwide revenue. The company also has more ambitious revenue targets, as it increased its full-year guidance to between $56.9 billion and $58.1 billion, reflecting a YoY growth rate of 17-19%. This was partly driven by the 53% YoY increase in pharmaceutical sales in the first quarter of 2022 and continued strong global growth in demand for its key products. The company also has the highest R&D expenditure at $2.6 billion this quarter, which further indicates its dedication to expansion.
Merck & Co. has had the lowest dividend growth out of the three companies mentioned, at just 52.6% between 2013 and 2021. This is roughly six times lower than AbbVie’s dividend growth rate, making it a worse stock for investors seeking to earn high cash returns. While the company’s one-year revenue growth was massive, revenue growth from 2018 has been much slower, at 15%. This is over the same period in which AbbVie experienced an increase in sales of 71%, and Pfizer saw growth of 52%, making Merk & Co. an underperformer.
Shane Vigna, Author at MyWallSt Blog