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The stock market sell-off is painful for investors who own stocks, but the good news is that declining stock prices present new buying opportunities. This is particularly true for dividend investors, as a falling stock price pushes a dividend yield higher.
In the Big Pharma space, there are plenty of high-yield stocks out there that are ripe for the picking. Two in particular that investors should consider are AbbVie (NYSE: ABBV) and an international pharmaceutical giant, GlaxoSmithKline (NYSE: GSK).
High Dividend Yields, Cheap Valuations
AbbVie is an under-the-radar Big Pharma pick, as it was spun off from former parent Abbott Laboratories (NYSE: ABT) in early 2013. But investors should get on board with AbbVie’s story, as the stock has delivered more than double the S&P 500’s return since the spinoff. AbbVie is up 75% since it began trading as an independent entity.
The reason is because AbbVie was the higher-growth business, due largely to its flagship Humira drug. Last quarter, the company grew organic revenue – which strips out the effects of foreign exchange – by 19% year-over-year, thanks mostly to 16% organic sales growth of Humira.
This helped AbbVie grow adjusted earnings per share by 31% last quarter. Going forward, AbbVie should have plenty of growth in store. It expects 9%-10% sales growth for Humira in the international markets this year.
Continued growth both domestically and abroad should provide AbbVie with strong earnings growth, and its 3.4% dividend yield is icing on the cake. Adding to this is AbbVie’s cheap valuation. At 11 times forward earnings estimates, AbbVie is a tempting dividend stock.
Glaxo’s Turnaround Story
For Glaxo, the story is different. It’s a slower-growth company, but the trade-off is that dividend investors are treated to a huge 6% dividend yield, which management has vowed to protect. In addition, Glaxo is a turnaround play.
Glaxo’s profits declined last year, because of generic competition to its bronchial drug Advair. In response, Glaxo has made big moves to reshuffle its product pipeline. Last year, it traded its massive oncology drug portfolio to its U.K. pharmaceutical peer AstraZeneca (NYSE: AZN) for a cool $16 billion. In return, Glaxo took ownership of several of AstraZeneca’s vaccine portfolio for $7 billion. In addition, the two companies set up a joint venture combining their consumer health care businesses.
Essentially, Glaxo’s management appears to be making a bet that the boom in cancer drug sales is near a top. In the aftermath of the deal, management stated it would be immediately accretive to earnings in the near term, as well as provide for a steadier long-term boost to EPS.
Cancer drugs are notoriously volatile, while vaccines are a little more consistent. This appears to be working in the early going, as Glaxo’s sales rose 4% through the first half of the year.
The good news is that Glaxo is cheap. The stock trades for just 7 times earnings. The market is clearly unconvinced in the company’s strategy, but if management proves that it knows what it’s doing, the stock could enjoy a significant snap-back rally.
Bet on These Big Pharma Dividends
Both AbbVie and Glaxo have struggled in recent months. AbbVie stock is down 8% year-to-date, while Glaxo is down 5%. But their dividend yields are now higher than they have been in several months, and their valuations are more attractive as well.
AbbVie and Glaxo both have the potential to grow revenue and earnings in the years ahead. For income investors, the health care space is a great place to look for market-beating dividends.
DISCLOSURE: Bob Ciura personally owns shares of GlaxoSmithKline (NYSE: GSK).
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