Dividend stocks can be tricky for investors. If you're looking to invest $1,000 and benefit from a stock that pays a dividend, you have to look past the stock's yield.
Yes, it's nice to have an above-average yield, but a company with an unsustainable dividend is no bargain. If the payout ratio is too high, there's a good chance a dividend cut is in the future, and that will likely lead to the stock's price tumbling as well, a double-whammy for investors.
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Two healthcare stocks offering above-average dividend yields, paired with valuations that appear underpriced relative to historical standards and broader industry peers, are Bristol Myers Squibb (NYSE: BMY) and Pfizer (NYSE: PFE). Their shares are up more than 23% and 14%, respectively, so far this year.
Here's why I think investing $1,000 in either of these pharmaceutical stocks makes sense for income-oriented investors.
Bristol Myers Squibb, based in Princeton, New Jersey, has paid dividends for 94 consecutive years and has increased its quarterly dividend for 17 straight years, including a 1.6% increase this year to $0.63 per share, yielding 3.76% at its current share price. That's nearly three times the S&P 500's average dividend yield.
Evaluating dividend safety using free cash flow (FCF) rather than reported net income provides a sharper picture for pharmaceutical companies, as GAAP net income can be skewed by non-cash charges, asset write-downs, and merger & acquisition accounting amortization. Bristol Myers Squibb's trailing FCF per share is around $5.59, indicating a FCF dividend payout ratio of around 45%, which is certainly safe.
Pfizer, based in New York, has paid a dividend for more than 87 years, and has increased that quarterly dividend for 16 consecutive years, including a 2.3% raise last year to $0.43 per share. Its dividend yield is an attractive 6.04% at its current share price, but that yield is a little more precarious. Its FCF dividend payout ratio is around 89%, which is covered, but certainly riskier.
Pfizer's management team has emphasized that protecting and growing the dividend is a top financial priority. However, until cost-reduction programs and new drug launches expand cash margins further, dividend growth is likely to remain muted.
Bristol Myers Squibb and Pfizer trade at steep discounts relative to major pharmaceutical peers such as Johnson & Johnson and Eli Lilly. Bristol Myers Squibb and Pfizer currently have forward price-to-earnings ratios below 10.
The main reason Bristol Myers Squibb's shares aren't higher is the concern about patent-exclusivity losses. However, the headwind from its loss of exclusivity for blockbusters such as the cancer therapy Revlimid and the blood thinner Eliquis is already priced into the stock, and the company's portfolio includes new oncology and immunology therapies that are beginning to offset its legacy patent losses.
In the second quarter, its legacy portfolio reported revenue of $5.4 billion, down 4%, year over year. However, its growth portfolio saw revenue rise by 15% to $7.6 billion, primarily due to cancer therapies Opdivo Qvantig, Breyanzi, and Opdualag, plus the anemia therapy Reblozyl and the heart medication Camzyos.
Pfizer soared during the pandemic because of its COVID-19 vaccine, Comirnaty, and the antiviral Paxlovid. Those sales are now sagging, but the company's research and development push and recent acquisitions, especially its $43 billion purchase of Seagan in 2023, should help it launch more than a dozen new drugs, as well as expand existing drugs, over the next few years.
In the second quarter, while sales of Comirnaty and Paxlovid dropped by 34% and 95%, respectively, compared to the same quarter a year ago, Pfizer said its launched and acquired products saw revenue grow by 18% operationally, year over year.
Cancer therapies are helping the company offset declining COVID-19 revenue. Bladder cancer therapy Padcev saw sales of $667 million, up 27% over the same period a year ago. Lorbrena, which treats metastatic non-small cell lung cancer, reported sales of $354 million, up 41% year over year, while prostate cancer therapy Orgovyx reported sales of $146 million, up 51% over the same quarter last year.
