One sector that has lagged dramatically over the past year, although it is very defensive and pays good dividends, is health care — specifically the big pharmaceutical stocks. The constant and shrill rhetoric from politicians over drug pricing is probably one reason for the underperformance. While the populist rhetoric is likely to stay for the duration of the 2016 election cycle, with the Republicans holding both house of Congress, industry-wide reforms are unlikely.
A new Deutsche Bank research report stresses that the market as a whole, less energy, is undervalued, especially versus bonds. With the market trading at 15.1 times the firm’s estimated 2016 earnings, less energy, the analysts note that is less than the median of 15.6, which it has traded at for the past 20 years. With investors looking for safety and dividends for total return, the big pharmaceutical stocks are just the ticket.
We screened the Deutsche Bank universe of large cap stocks rated Buy, and found four pharmaceutical companies that are outstanding buys for investors seeking growth and income now.
This top pharmaceutical stock has very solid growth potential though shares are down over 20% since last summer. Abbott Laboratories (NYSE: ABT) is a leading diversified global health care company that develops, manufactures and markets branded generics, medical devices, nutritional products and diagnostic solutions. It offers a diversified large cap play as earnings are split between five well-positioned business segments.
The company recently agreed to acquire the equity in Minnesota-based Tendyne Holdings that it does not already own for $250 million plus future payments tied to regulatory milestones. Wall Street likes the purchase and the way the company is putting its substantial balance sheet to work.
Abbott Labs posted very solid fourth-quarter results, which featured diluted earnings per share of $0.71 in the quarter and $2.28 for the full year, above Abbott’s previous guidance range and reflecting 13.4% growth. Worldwide sales of $5.4 billion from continuing operations for the quarter increased 10.2% on an operational basis, including double-digit growth in emerging markets. Worldwide sales increased 5.6% on a reported basis, including an unfavorable 4.6% effect of foreign exchange.
Investors receive a 2.65% dividend, which was just recently raised by 8%. The Deutsche Bank price target for the stock is $49, and the Thomson/First Call consensus target is $43.93. Shares closed Friday at $39.52.
This stock checks in at high on the global pharmaceutical lists at many top Wall Street firms. Eli Lilly and Co. (NYSE: LLY) is a global health care company with numerous core products in a number of primary-care pharmaceutical markets. The company generates revenues from its pharmaceutical product and animal health segments.
The product portfolio includes Zyprexa (for schizophrenia and bipolar disorder), Gemzar (pancreatic cancer), Evista (osteoporosis), Cymbalta (depression), Cialis (erectile dysfunction), Strattera (attention deficit hyperactivity disorder), Erbitux (cancer) and Alimta (chemotherapy). The company also has a strong presence in the diabetes market.
Fourth-quarter earnings were in line with the consensus forecast. While the overall numbers were unremarkable, many analysts are still very focused on the company’s outstanding late-stage product pipeline, which they view as very undervalued. They also remain very positive on what they call the “huge growth potential” prospects for Jardiance, which is a prescription medicine used along with diet and exercise to lower blood sugar in adults with type 2 diabetes.
Shareholders receive a 2.77% dividend. The Deutsche Bank has a $99 price target, and the consensus target is $98.10. Shares closed trading most recently at $73.60.