Healthcare Business

Analyst's Top Pharmaceutical Buys Offer Big Dividends and Growth Potential

Ever since the fall of last year when Hillary Clinton spoke out on high drug prices, the top stocks in the pharmaceutical sector have taken a beating. With Clinton defeated and the Republicans controlling both houses of Congress, it’s a pretty good bet that while there may still be some pressure to control pricing, as many top drugs remain very expensive, draconian government price controls seem, at least for now, very unlikely.

With the top pharmaceutical stocks trailing the market by a large margin, they are starting to look very attractive for long-term growth and income investors. We screened the Merrill Lynch research database for the highest yielding companies that were also rated Buy. We found four that look like outstanding values now.

Abbott Laboratories

Shares of this top pharmaceutical stock with very solid growth potential are down over 15% from highs hit 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.

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.

The company also offers a diversified large cap play as earnings are split between five well-positioned business segments: Nutritionals (31% of revenues), Vascular (13%), Generic Pharmaceuticals (20%) and Diagnostics (25.5%) and Diabetes (10.5%).

Back in July, CEO Miles White, who has been at the firm for over three decades, bought a stunning $45.5 million worth of company stock, which added to his already substantial holdings. The purchase made him one of the top 100 shareholders.

Abbott Labs investors receive a 2.73% dividend. The Merrill Lynch price target for the stock is $50. The Wall Street consensus target is $47.38. The shares closed Wednesday at $38.07.

Eli Lilly

This is another stock with substantial upside potential. 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). Eli Lilly also has a strong presence in the diabetes market.

The company posted third-quarter sales and earnings well below Wall Street’s expectations, prompting shares to plummet to a four-month low before rebounding. The stock is down almost 10% on the year and offering investors an outstanding entry point. Top analysts on Wall Street are still very focused on the company’s outstanding late-stage product pipeline, which they and others on Wall Street view as very undervalued.

Last week the company announced a disappointing Phase 3 trial for its Alzheimer’s drug solanezumab, which missed the primary and secondary endpoints. While the analysts are forced to remove potential earnings from their model due to the failure, they remain positive on the stock based on “Underappreciated growth, driven by the diabetes base business, baricitinib and abemaciclib.”

Shareholders receive a 3.05% dividend. Merrill Lynch lowered its price objective to $90 from $105, and the consensus price target is $97.05. Shares closed Wednesday at $67.12.