Beyond the Pharma Patent Cliff, Dividends Galore (LLY, BMY, MRK, PFE, ABT)

Many drug companies face a what is called a patent cliff ahead, where the Big Pharma players will have key drugs go off-patent and there will be new generic competition.  While this is a challenge it is also why these companies screen out as value, income, and safety in most search screens.

Our screen yielded six companies.  We list them here by the size of their dividends in descending order: Eli Lilly & Co. (NYSE: LLY) , Bristol-Myers Squibb Company (NYSE: BMY), Merck & Co. Inc. (NYSE: MRK), Pfizer Inc. (NYSE: PFE), Abbott Laboratories (NYSE: ABT) and Johnson & Johnson (NYSE: JNJ).   The six companies pay dividends ranging from 3.45% to 5.27%.  Beyond attractive dividends,  all of these companies boast additional positive characteristics including: forward PE’s lower than 13.5; price to free cash flow (P/FCF) per share lower than 28; and, average volume greater than 2 million shares per trading day.  Five of the six companies sport Return on Equity (ROE) greater than 9%.

The industry faces notable challenges in aiming for positive year-over-year earnings comparisons over the next several years.  Investors today are not able to look at drug companies as a mega-growth sector like they could in the 1990s.  A significant bolstering factor:  cash equivalents on the balance sheets of these six Big Pharma are sufficient to meet dividend payouts for multiple years. Except where otherwise noted, the source for all performance and financial data is Finviz.com.

In recent weeks, all six of these companies have demonstrated relative strength in the face of market declines.  Both the Dow Industrials and S&P 500 have fallen more than 7% since reaching their intermediate highs on the last trading day of April, 2011. During the same period, shares of these six Big Pharma companies have been under pressure as well, but have realized markedly lesser losses.  The shares of two of them, Eli Lilly & Co. (NYSE: LLY)  and Johnson & Johnson (NYSE: JNJ) actually posted tiny price gains, resulting in credible total returns. The other four companies showed share price losses ranging between 1.4% and 3.7%.

Eli Lilly & Co.  (NYSE: LLY) pays a 5.3% dividend with an earnings payout ratio of 46.4%.  Should Lilly encounter a period of declining earnings, its balance sheet boasts $5.80 “cash per share,” sufficient to cover its dividend payout for 12 quarters. Its forward PE is 10 and its price to free cash flow (P/FCF) is 11.6.  Its shares closed at $37.20 Wednesday, down1.1%. Its 52-week price range is $31.12 to $39.40.

Bristol-Myers Squibb Company (NYSE: BMY)  pays a 4.8% dividend with an earnings payout ratio of 67%.  Bristol-Myers holds $3.98 cash per share, sufficient to cover its dividend for 12 quarterly payouts.  Its forward PE is 13.3 and its price to free cash flow (P/FCF) is 24.3.  shares closed at $27.42 Wednesday, down 0.98%.  Its 52-week range is $23.35 to $28.99.

Merck & Co. Inc. (NYSE: MRK)  pays a 4.3% dividend.  Over the next several quarters, bottom line numbers are expected to lower Merck’s horrendous earnings payout ratio to more acceptable levels.  Currently this payout ratio is 292.5%.   Clearly, current quarterly earnings are covering only one third of the company’s current quarterly dividend.  Merck’s $4.22 cash per share is sufficient to cover its dividend payout for 11 quarters. Its forward PE is 9.1 and its price to free cash flow (P/FCF) is 22.6.  Merck’s shares closed at $35.17 Wednesday, down 1.3%.  Its 52-week trading range is $30.73 to $37.25.

Pfizer Inc. (NYSE: PFE) pays a 3.96% dividend with an earnings payout ratio of 69.9%.  The company holds $3.09 cash per share, sufficient to cover its dividend for 15 quarterly payouts. Its forward PE is 8.9 and its price to free cash flow (P/FCF) is 10.8.  Pfizer’s shares closed at $20.19 Wednesday, down 1.9%.  Its 52-week range is $13.43 to $21.45.

Abbott Laboratories (NYSE: ABT) pays a 3.74% dividend with an earnings payout ratio of 62.1%.  Abbott’s balance sheet cash per share is $4.18, sufficient to cover its dividend payout for 9 quarters.  Its forward PE is 10.4 and its price to free cash flow (P/FCF) is just less than 15.  Abbott Lab’s shares closed at $51.31 Wednesday, up 0.04%.  Its 52-week range is $43.41 to $54.24.

Johnson & Johnson (NYSE: JNJ)  pays a 3.45% dividend with an earnings payout ratio of 48.3%.  The company’s $9.80 cash per share is sufficient to cover its dividend payout for 17 quarters.  Its forward PE is 12.5 and its price to free cash flow (P/FCF) is 27.3.  The company’s shares closed at $66.16 Wednesday, down 1.4%.  Its 52-week range is $54.88 to $67.36.

Jim Berdou