Why Big Pharma Stocks May Offer Big Upside and Dividends for the Second Half of 2018

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Big Pharma is looking good for investors in the second half of 2018. That’s the message from the research team at Bank of America Merrill Lynch. This should not be incredibly surprising considering that the firm’s August RIC Report moved into an Overweight stance on health care. What does stand out here is that Merrill Lynch is now above-consensus on many of the pharmaceutical leaders.

According to the Merrill Lynch team, the headwinds that have been present are abating and opportunities remain for selective investors. The firm is expecting continued sector momentum after a strong second-quarter earnings season, and the firm has a list of top large-cap pharmaceutical ideas for the second half of 2018. Also worth noting is the so-called optionality that exists in the industry: pipeline catalysts, new product launches and the possibility of mergers and acquisitions.

The major themes include domestic drug pricing, somewhat limited patent exposure, upcoming clinical data, potential mergers and acquisitions, and even corporate restructuring as drivers for pharmaceuticals.

We have compared the Merrill Lynch price objectives to the consensus (mean) analyst target prices from Thomson Reuters and have added in trading color on each as well. Four of the Big Pharma names have Buy ratings and two have Neutral ratings, but the price objectives have been raised on them all.

The two Dow Jones industrial average components saw their targets raised by Merrill Lynch. Merck & Co. Inc. (NYSE: MRK) saw its price objective raised to $78 from $74, compared with a current share price of $69.15, and Pfizer Inc. (NYSE: PFE) saw its price objective raised to $45 from $43, versus a current share price of $42.00. These targets are above consensus as Thomson Reuters has consensus targets of $71.09 for Merck and $40.95 for Pfizer. Pfizer also carries that 3.2% dividend yield, and Merck has a 2.8% dividend yield.

AbbVie Inc. (NYSE: ABBV) was reiterated as Buy and the price objective was raised to $107 from $105. The stock was recently at $97.50 a share, and its consensus analyst target is $109.35. Yet, this is also down from a 52-week high of $125.86, and its shares aren’t that much better off than when its Dutch auction stock buyback was announced. AbbVie’s dividend yield is about 3.9%, now that its shares have pulled back so much from its highs.

Allergan PLC (NYSE: AGN) comes with a Buy rating at Merrill Lynch and was recently trading at $189.50. Its price objective was raised to $220 from $215, and the consensus target is $208.45. Allergan has a 52-week range of $142.81 to $237.41, and its dividend yield is about 1.6%.

Bristol-Myers Squibb Co. (NYSE: BMY) is only rated as Neutral at Merrill Lynch, but the drug giant saw its target raised to $63 from $61. The rating may not be that strong, but that price objective is against a current price of $60.25 and a consensus price target of $59.44.

Eli Lilly and Co. (NYSE: LLY) also has a Neutral rating, and it was trading at $105.00. Merrill Lynch raised its price objective to $106 from $101, and the consensus analyst target price is $97.13.

As a reminder, Big Pharma stocks are traditionally considered to be somewhat defensive for those investors who are worried about broad market valuations or who are still holding out for that elusive market sell-off. It turns out that most people don’t stop taking their medications each time the broader market tanks, and those dividends are meant to offset some downside as well.