2 Undervalued Pharmaceutical Stocks to Buy Now

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Some investors love their dividends. Lucky for them, there are a lot of great companies that can afford to pay their shareholders cash every quarter. Pharma giants AbbVie (NYSE:ABBV) and GlaxoSmithKline (NYSE:GSK) boast high and sustainable dividend yields that are great for investors who want to see those dividends hit their account every three months. As a bonus, both stocks are undervalued today, and I think their total returns could outperform the market over the next few years. 

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Still off their highs

Both AbbVie and GlaxoSmithKline have been beaten down over the last 12 months, and are still trading off of their highs from before the COVID-19 crash in March 2020. Despite growing earnings and raising its dividend over the past few years, AbbVie is 9% below its 2018 high of $123. GlaxoSmithKline, on the other hand, has been trading with some volatility for the past 12 months. After missing the mark on a potential COVID-19 vaccine, the company’s shares still trade about 50% below the highs set back in 1999.

As seasoned investors know, stock price doesn’t tell the whole story. These companies’ fundamentals look solid, and there haven’t been any dividend reductions or huge drug patent cliffs encountered so far.

Growing dividends

AbbVie has rewarded shareholders tremendously over the past few years through dividend increases. Shareholders holding AbbVie stock for the last five years have seen a compound annual growth rate on their dividends of 18.09%. In October 2020, AbbVie increased the dividend by 10%. The company’s payout ratio of 167% reflects how it leans on its cash stash (of about $8.5 billion per year) to continue rewarding shareholders. AbbVie’s continued sales from drugs like best-selling Humira, Skyrizi, and Rinvoq, suggest that it could grow its dividend well into the future. AbbVie has increased its dividend by 225% since its spinoff from Abbott in 2013.

GlaxoSmithKline has grown its dividend over the last 10 years at a compound annual growth rate of just 0.39%. With the lost revenue from the soon spinoff of its consumer health segment, management has signaled a potential dividend cut in the future. Doing this will keep the payout ratio manageable (it’s currently around 70%), as well as allow more cash be directed to rebuilding its pipeline of drugs.

Simple, safe investments

AbbVie currently markets the No. 1 best-selling drug in the world, Humira. The immunologic pulled in over $19.8 billion in 2020, and has been a massive part of the company’s success over the last few years. AbbVie blew past analyst expectations for total revenue last year, posting 37.69% year-over-year growth in 2020. The pharmaceutical sector median for 2019 to 2020 revenue growth was just 4.69%. Considering this, I think the company is actually trading at a discount. AbbVie’s current forward price-to-earnings (P/E) ratio of about 9 is below its high of 10.4 in late 2020.

GlaxoSmithKline has managed to separate itself from the pack in part by being a big player in the vaccine, HIV, and respiratory businesses. GSK’s HIV segment brought in $6.5 billion last year. GlaxoSmithKline sells some other notable drugs like Advair, which combines two of its other asthma products, Flovent and Serevent. Respiratory is its biggest segment, pulling in over $9 billion in 2020.

Going forward, as the company spins off its consumer health business and turns to focus on research and development, earnings per share are expected to dip as the company temporarily loses sales. GlaxoSmithKline has also been trading at very cheap valuations compared to historical averages. Just in 2019, we saw the company trading between 15 and 20 times earnings. If we take a 15 P/E ratio and multiply it by 2020’s earnings per share, we would get a stock price of around $47. This represents a 27% possible price appreciation, more than enough to beat the market if GlaxoSmithKline can make a run to old levels.

GlaxoSmithKline currently sports a 5.6% dividend yield while AbbVie offers a 4.4% yield. Compared to the SPDR S&P 500 ETF, which only yields 1.3%, these two companies more than excel in providing dividend income. Still off their all-time highs, these two companies can potentially deliver above-market returns in total stock price appreciation but can also outperform the indexes when delivering dividend income. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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