One sector that has lagged dramatically over the past year, although it is very defensive and pays good dividends, is health care — specifically the big pharmaceutical stocks. The constant and shrill rhetoric from politicians over drug pricing is probably one reason for the underperformance. While the populist rhetoric is likely to stay for the duration of the 2016 election cycle, with the Republicans holding both house of Congress, industry-wide reforms are unlikely.

A new Deutsche Bank research report stresses that the market as a whole, less energy, is undervalued, especially versus bonds. With the market trading at 15.1 times the firm’s estimated 2016 earnings, less energy, the analysts note that is less than the median of 15.6, which it has traded at for the past 20 years. With investors looking for safety and dividends for total return, the big pharmaceutical stocks are just the ticket.

We screened the Deutsche Bank universe of large cap stocks rated Buy, and found four pharmaceutical companies that are outstanding buys for investors seeking growth and income now.

Abbott Laboratories

This top pharmaceutical stock has very solid growth potential though shares are down over 20% since last summer. 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 offers a diversified large cap play as earnings are split between five well-positioned business segments.

The company 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. Wall Street likes the purchase and the way the company is putting its substantial balance sheet to work.

Abbott Labs posted very solid fourth-quarter results, which featured diluted earnings per share of $0.71 in the quarter and $2.28 for the full year, above Abbott’s previous guidance range and reflecting 13.4% growth. Worldwide sales of $5.4 billion from continuing operations for the quarter increased 10.2% on an operational basis, including double-digit growth in emerging markets. Worldwide sales increased 5.6% on a reported basis, including an unfavorable 4.6% effect of foreign exchange.

Investors receive a 2.65% dividend, which was just recently raised by 8%. The Deutsche Bank price target for the stock is $49, and the Thomson/First Call consensus target is $43.93. Shares closed Friday at $39.52.

Eli Lilly

This stock checks in at high on the global pharmaceutical lists at many top Wall Street firms. Eli Lilly and Co. (NYSE: LLY) is a global health care company with numerous core products in a number of primary-care pharmaceutical markets. The company 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). The company also has a strong presence in the diabetes market.

Fourth-quarter earnings were in line with the consensus forecast. While the overall numbers were unremarkable, many analysts are still very focused on the company’s outstanding late-stage product pipeline, which they view as very undervalued. They also remain very positive on what they call the “huge growth potential” prospects for Jardiance, which is a prescription medicine used along with diet and exercise to lower blood sugar in adults with type 2 diabetes.

Shareholders receive a 2.77% dividend. The Deutsche Bank has a $99 price target, and the consensus target is $98.10. Shares closed trading most recently at $73.60.
Johnson & Johnson

With a diverse product base and a very popular and solid brand, this is among the most conservative big pharmaceutical plays. Johnson & Johnson (NYSE: JNJ) is one the top market cap stocks in the health care sector and will raise the dividend for shareholders this year for the 53rd consecutive year. It has increased its dividend by 8.8% per year over the past decade and by 7.1% over the past three years. With over $37 billion in cash on hand compared to $14 billion in debt and a modest payout ratio of 54%, Johnson & Johnson can easily afford to continue its mid-single digit dividend growth rate.

With everything from medical devices to over-the-counter health items and prescription drugs, it remains one of the most diversified health care names on Wall Street. Johnson & Johnson also has one of the most exciting pipelines of new drugs, making the stock an outstanding holding for conservative accounts with a long-term view. The company generates a little over half of its sales in international markets, which are expected see higher spending on health care over the next 10 years and beyond.

Shareholders receive a 2.85% dividend. The $117 Deutsche Bank price target is well above the consensus target of $108.33. The shares closed Friday at $105.78.

Pfizer

This 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 announced recently the details in what would be one of this year’s biggest deals, a $160 billion merger with Allergan. But the Treasury Department also has announced that it is working on new rules for corporate tax inversions, which is potentially what the Pfizer/Allergan deal would be, and that could possibly throw wrench into the negotiations. Pfizer executives maintain that the government will not scuttle the deal.

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 rich 3.97% dividend. The Deutsche Bank price target is set at $41. The consensus price target is $39.13. Pfizer closed Friday at $30.23.

Health care has been hammered since the start for the year, down almost 9%, and all these top stocks to buy have been knocked down to some of the lowest trading levels in the past year. Draconian price controls are very unlikely, and investors looking for solid total return with a degree of safety should look at all four of these top companies.

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