Dividend Investors Have Reasons to Look to Big Biotech Over Big Pharma Ahead

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Over the past three decades, the unlimited investing potential of biotechnology was all about growth. Companies could grow from nothing to see untold billions of dollars selling cures and treatments for the likes of cancer, HIV/AIDS, hepatitis, diabetes, heart conditions and so on. Ultimately, all growth stocks become mature companies, and that process can be painful during that adjustment period.

Investors have historically viewed the pharmaceutical giants as defensive stocks that pay solid dividends. After all, unemployment can be up and gross domestic product can be down, but if you have a chronic disease or become ill, you are going to need treatment no matter what the state of the economy is. Things have changed in recent years, and the lines between Big Pharma and the maturing Big Biotech segment are becoming more blurred. That blurring of lines also has come as many Big Pharma players have acquired biotech outfits with valuations in the hundreds of millions way up into the tens of billions.

It turns out that some of the largest biotech companies are paying as much and even more than the top pharmaceutical companies. This might not have been as important in 2017 and 2018, when interest rates were on the rise, but now that interest rates have come down so much there needs to be some special attention here.

On last look, there is close to a combined $15 trillion of sovereign debt around the world that comes with the dreaded negative interest rates. The U.S. Treasury yields were last seen at 1.59% for the two-year note and 1.68% for the 10-year note, and the U.S. Treasury’s 30-year long-bond yield was at just 2.19%.

Health care stocks may be targeted by politicians for drug prices and for myriad other issues (opioids, generics, access and so forth). That said, most investors probably would bet that even pharmaceutical companies and the big biotech companies are more likely to see price appreciation over the next decade or two. Now add in the notion that investors can get far better than the 10-year Treasury note’s 1.68% yield and in some cases can get dividend yields that outpace the 30-year Treasury’s 2.19% yield.

24/7 Wall St. has evaluated all pharmaceutical and biotech companies that pay dividend yields above 2% based on their current prices. We also have set a floor of a $10 billion valuation to keep a focus on the companies that are both established and have seen a history of posting operating earnings. It turns out that the top U.S.-based dividend payers in health care actually have market caps that are all well in excess of $50 billion.

Merck & Co. Inc. (NYSE: MRK) and Pfizer Inc. (NYSE: PFE) are the two pure-play pharma stocks that are members of the Dow Jones industrial average. Pfizer has again become the most shorted stock of all Dow stocks, but its share performance has been bad enough that its dividend yield is now about 3.95%. Merck’s shares come with close to a 2.6% dividend yield, based on the current share price. Pfizer’s dividend is so much higher than Merck’s because Pfizer shares are down in 2019 by over 16%, versus nearly a 12% year-to-date gain for Merck.

AbbVie Inc. (NYSE: ABBV) remains the king of health care dividends, within the parameters of this screen, with a dividend yield of about 6.5%. The problem here is that its dividend is so high because the shares are down close to 30% so far in 2019, and the dominance and exclusivity of Humira rolling off has created a position in which the great revenue growth of the past is just not expected to continue in the coming years.

Johnson & Johnson (NYSE: JNJ) has some problems around both talcum powder and exposure to opioids, but this Dow stock is diversified in consumer products and medical devices and equipment on top of pharmaceuticals. It also can be counted on to continue its dividend growth after joining the ranks of companies hiking dividends for 50+ consecutive years. Its current yield of 2.88% is at a time when the shares are within a longer-term trading range and when the shares are still slightly positive for all of 2019.