For years, one of the most dependable sectors, especially for more conservative investors, was health care, which included the top pharmaceutical and biotech stocks among other holdings. However, over the past five years, the sector, while delivering positive total returns, has massively underperformed some of the more popular sectors like technology. In fact, the S&P 500 Health Care Sector was up 10.8% over the past year, underperforming the S&P 500’s 19.1% return.
The decade-long expansion in the stock market faces a period of heightened volatility and risk, and the health care sector could benefit from a shift toward more defensive areas. In the sector, stocks we looked at have strong balance sheets, attractive dividend yields and improved cost structures.
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There always remains the risk for health care in an election year. There have been five presidential elections since 2000, and only once did health care outperform the S&P 500, but with the way the market looks now, trading at all-time highs, with bloated multiples, it might be time for a switch.
We screened the Merrill Lynch health care research database looking for large pharmaceutical leaders that also pay solid and dependable dividends. We found five that make sense for growth and income investors.
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Abbott Labs
This top pharmaceutical and med-tech stock has very solid growth potential. Abbott Laboratories (NYSE: ABT | ABT Price Prediction) manufactures and sells health care products worldwide.
The company’s Established Pharmaceutical Products segment offers branded generic pharmaceuticals to treat pancreatic exocrine insufficiency; irritable bowel syndrome or biliary spasm; intrahepatic cholestasis or depressive symptoms; gynecological disorders; hormone replacement therapy; dyslipidemia; hypertension; hypothyroidism; Ménière’s disease and vestibular vertigo; pain, fever and inflammation; migraines; anti-infective clarithromycin; cardiovascular and metabolic products; and influenza vaccines, as well as to regulate physiological rhythm of the colon.
Its Diagnostic Products segment provides immunoassay and clinical chemistry systems; assays used to screen or diagnosis cancer, cardiac, drugs of abuse, fertility, infectious diseases, and therapeutic drug monitoring; hematology systems and reagents; diagnostic systems and cartridges; instruments to automate the extraction, purification and preparation of DNA and RNA from patient samples, and detects and measures infectious agents; genomic-based tests; informatics and automation solutions; and a suite of informatics tools and professional services.
Abbott Labs investors receive a 1.65% dividend. Merrill has a Buy rating with a $95 price target, though the Wall Street consensus target is higher at $100.46. The shares closed trading on Monday at $88.30.
AstraZeneca
This stock still offers investors a solid entry point after seesawing last year. AstraZeneca PLC (NYSE: AZN) is a global, innovation-driven biopharmaceutical business that focuses on the discovery, development and commercialization of prescription medicines, primarily for the treatment of cardiovascular, metabolic, respiratory, inflammation, autoimmune, oncology, infection and neuroscience diseases. AstraZeneca operates in over 100 countries, and millions of patients worldwide use its innovative medicines.
This company also has an outstanding pipeline, especially in oncology. The broad pipeline of next-generation investigational medicines is focused on four main disease areas: ovarian, lung, breast and haematological cancers. These are being targeted through four key platforms: immuno-oncology, the genetic drivers of cancer and resistance, DNA damage repair and antibody drug conjugates.
The company reports Wednesday, and the analyst said this in anticipation:
Fiscal year core EPS of $3.57, on product sales of $23.7 billion, +13% year-over-year. Questions for the call include launch drivers, leverage and China. Fiscal year 2020 EPS guide likely $4.00-4.20, with our $4.12, below consensus of $4.20. Buy driven by best in class growth and launches that offer upside to consensus.
Shareholders receive a 2.83% dividend. Merrill’s price objective for the stock is $51.70, and the consensus target price is $53.05. AstraZeneca stock closed Monday’s trading at $49.91 a share.
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Bristol-Myers
This one always remains a solid pharmaceutical stock to own. Bristol-Myers Squibb Co. (NYSE: BMY) is a global pharmaceutical company focused on discovering, developing, licensing and marketing chemically synthesized drugs or small molecules and biologics in various therapeutic areas, including virology comprising human immunodeficiency virus infection (HIV), oncology, neuroscience, immunoscience and cardiovascular.
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The company reported solid fourth-quarter results last week, and Merrill noted this:
Bristol reported strong 4Q results (though largely ahead of Street given the recognition of Celgene revenue). We highlight the 2020 / 2021 provided guidance as the key focus for investors, as well as +$5 billion increase in share repurchase. While guidance comes in light, we expect the results to be viewed favorably by the Street and look for share strength.
Shareholders receive a 2.72% dividend. The $95 Merrill price target is well above the $72.30 consensus target. Bristol-Myers stock closed most recently at $66.91 per share.
Eli Lilly
This is another drugmaker with solid upside potential. 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). Eli Lilly also has a strong presence in the diabetes market.
Eli Lilly fourth-quarter results also came in strong, and the analysts said this:
With a strong close to 2019, Lilly’s industry-leading top- and bottom-line growth appears on track to continue in 2020. 2020 is shaping up to be a big year of clinical and regulatory catalysts across all of Lilly’s core franchises. Discontinuation of pegilodecakin, while a disappointment for Lilly’s oncology franchise, was already removed from our model.
Shareholders receive a 2.02% dividend. Merrill has set a $155 price objective. The consensus target is $139.50, but Eli Lilly stock was last seen trading at $145.51.
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Novartis
This is among the world’s largest pharmaceutical drug makers by sales and remains a top international pick across Wall Street. Novartis A.G. (NYSE: NVS) develops, manufactures and markets a range of health care products worldwide.
Novartis operates through three segments: Pharmaceuticals, Alcon and Sandoz. The Pharmaceuticals segment offers patented prescription medicines for oncology, neuroscience, retina, immunology and dermatology, respiratory, cardio-metabolic, established medicines and cell and gene therapies. Key products include Cosentyx (for psoriasis and others), Entresto (heart failure), Lucentis (wet macular degeneration) and Gilenya (multiple sclerosis).
The company posted inline results, and the analysts noted this about the forward guidance:
Novartis guidance was broadly in line with our and consensus expectations. Core operating income is expected to grow high single to low double-digit, and net sales are expected to grow mid to-high single-digits with Pharma mid-to-high single digits and Sandoz low single digits. This excludes Alcon and oral solids being divested to Aurobindo from both 2019 and 2020, and assumes no Gilenya or Sandostatin LAR generics enter in 2020 in the US.
Novartis offers shareholders a 3.17% dividend. The Merrill price target is $103. The consensus target is $102.67, and the shares closed at $97.42 on Monday.
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Note that sentiment will swing this year, especially if some of the more far-left candidates look like they are taking a lead. With that in mind, there may be dips that will offer better buying opportunities, so it may make sense to scale buy some shares for a partial position now, especially in front of or right after ex-dividend dates.
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