No matter whom the pundit is on Wall Street, the expectations for next year are not overly bullish. While few see massive declines, the big run on the S&P 500 from the 1,500 breakout in May of 2013 is starting to get a little long-in-the-tooth and could be the precursor of some sideways trading for the next couple of years.
Dividend stocks did poorly in 2015, and Merrill Lynch is a big fan of quality dividend companies for 2016. While they may not have the highest yield, they have years of steady increases and dependable payments. One sector that many are bullish on for 2016 is health care, so we screened the Merrill Lynch research data base for dividend paying pharmaceutical stocks that are rated Buy. We found four top companies to buy now.
Abbott Laboratories
This top pharmaceutical stock has very solid growth potential. 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. It 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. Merrill Lynch 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%), Diagnostics (25.5%) and Diabetes (10.5%).
The company posted solid third-quarter earnings, and the emerging market sale growth continues to impress. Merrill Lynch has advised investors since the August sell-off to stay with the company.
Abbott Labs investors receive a 2.31% dividend, which was just recently raised by 8%. The Merrill Lynch price target for the stock is $53, and the Thomson/First Call consensus target is $51.32. Shares closed Thursday at $45.10.
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Eli Lilly
This stock is high on the global pharmaceutical lists at many top Wall Street firms and is on the Merrill Lynch US 1 list. Eli Lilly and Co. (NYSE: LLY) is a global health care company with numerous core products in a number of primary-care pharmaceutical markets. It 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 reported better-than-expected third-quarter earnings, though revenues fell short, reflecting some potential generic competition for Cymbalta and Evista in the United States, as well as some negative currency movement. Trajenta, Strattera, Forteo and the animal health business should all help to offset the impact of genericization of former top-selling drugs.
The company’s new cancer drug Cyramza won U.S. Food and Drug Administration (or FDA) approval for label expansion recently. It treats patients suffering from metastatic colorectal cancer. This was the fourth Cyramza approval in a one year period; it already has approval to treat advanced or metastatic gastric or gastroesophageal junction adenocarcinoma and metastatic non-small cell lung cancer.
Shareholders are paid a solid 2.38% dividend. The Merrill Lynch price target is raised to $108 from $104, as the analysts are very bullish on the company’s underappreciated pipeline and catalyst-rich event path. The consensus price target is $97.70. Shares closed Thursday at $85.85.
Merck
This leading health care stock is on the focus lists of many of the firms we cover. Merck & Co. Inc. (NYSE: MRK) sells numerous prescription medicines, vaccines, biologic therapies and consumer care and animal health products customers in more than 140 countries. Merck is the world’s fourth-biggest drugmaker by revenue and boosted its annual profit forecast earlier this year.
The pharmaceutical giant recently announced very encouraging data from two pivotal Phase 3 clinical studies for its investigational antitoxin bezlotoxumab for prevention of recurrence of clostridium difficile infection. Data from the studies, dubbed MODIFY I and MODIFY II, evaluated the use of bezlotoxumab alone or in combination with actoxumab. Both the studies met their primary efficacy endpoint.
Back in the fall the FDA granted breakthrough therapy designation to Merck’s Keytruda, as the company managed to prove that the drug is better than existing therapies for treating non-small cell lung cancer. Keytruda was tested on a clinical subgroup of 61 patients who had been treated either by chemotherapy or targeted therapy and had tumors expressing the protein PD-L1. In patients that treated with Keytruda, tumors shrank by 41%, and the effect continued for 2.1 to 9.1 months. However, the relationship between Keytruda use and survival rate or disease symptoms is yet to be conclusively proved.
Merck shareholders receive a very solid 3.48% dividend. The Merrill Lynch price target is $63, and the consensus target is $62.26. Shares closed Thursday at $52.85.
Pfizer
This stock could be offering investors the best value at current trading levels. Pfizer Inc. (NYSE: PFE) has a very strong pipeline, and being the world’s largest drug manufacturer by sales value supports the Wall Street notion that the company can generate higher long-term revenues through the accelerated growth of its new drugs over the next five years. The company recently announced he details in what would be one of this year’s biggest deals, a $160 billion merger with Allergan. Though specifics are still emerging, the deal would be the largest 2015 acquisition.
The U.S. Treasury Department announced recently that it is working on new rules for corporate tax inversions, which is potentially what the Pfizer-Allergan deal would be, and could possibly throw a wrench into the negotiations.
Pfizer has announced that it is starting 20 clinical trials this year and more soon after on treatments to conquer cancer, as it also seeks to gain leadership in one of the hottest and most lucrative areas of medicine. Pfizer currently has eight approved cancer medicines, four of them launched in the past four years. It is running late-stage patient tests on five of those drugs for additional uses and has three other drugs in late-stage testing, which is usually the last round before seeking regulatory’ approval. In addition, the company has 14 other drug programs in early stages.
Pfizer investors receive a 3.57% dividend. The Merrill Lynch price target is $39. The consensus target is higher at $40.27. Pfizer closed Thursday at $32.62.
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While political sabre rattling over drug pricing could continue to remain front and center during the 2016 election year, the reality is these companies all provide drugs, and in some cases medical devices, that help hundreds of thousands of people daily lead a better life. They make good sense for conservative portfolios looking for income and growth next year.
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