Why the Stock Market’s Sticking with These Two Pharma

Why the Stock Market’s Sticking with These Two Pharma image 040613 PC clarkStock Market’s Sticking with These Two PharmaOne sector we haven’t looked at in quite some time is the big pharmaceutical stocks sector. Exposure to this sector is always welcome in a long-term stock market portfolio.

Like every company, big pharmaceutical companies experience their own business cycles, but dividend payments within the group are significant and worthy of attention.

Bristol-Myers Squibb Company (NYSE/BMY) was one of the higher dividend paying stocks within the group.

The company got a major Wall Street upgrade from Citigroup, based on its Phase 3 development program for “Nivolumab,” a new cancer treatment.

The company recently experienced renewed stock market momentum after a period of consolidation. Its dividend yield is approximately three percent now because of the run-up. It was closer to five percent not too long ago.

I’m still a fan of combo pharmaceutical companies for long-term portfolios. By this I mean companies with other business lines, rather than pure-play drug development stocks. I’m referring to companies like Johnson & Johnson (NYSE/JNJ), which has pharmaceuticals, consumer products, medical devices, and diagnostics business lines. There’s also Abbott Laboratories (NYSE/ABT), which sells drugs, eye-care products, nutritional products, and dog food.

This multifaceted business approach that includes the expensive, but also rewarding business of drug development creates a nice bit of diversification as the business cycle changes.

Like virtually everything else in the large-cap space, Abbott has done great on the stock market over the last couple of years. The company only experienced two long periods of flat performance since 1999. Abbott’s stock chart is featured below:

Why the Stock Market’s Sticking with These Two Pharma image Abbott Laboratories ChartAbbott Laboratories Chart

Chart courtesy of www.StockCharts.com

In its latest quarterly report, the company’s earnings from continuing operations improved substantially to $545 million, up from $351 million.

Global revenues grew 3.5% on an operational basis to $5.4 billion. Currency translation knocked this back to 1.8%. The company’s strongest growth was in its nutrition division, followed by diagnostics, and then established pharmaceuticals. (See “Why DuPont’s Earnings Results Are So Typical for This Stock Market.”)

Like Johnson & Johnson, Abbott is now trading at an all-time record-high on the stock market. In terms of valuation, however, Abbott has a price-to-earnings (P/E) ratio of approximately 11.5. Johnson & Johnson’s is around 23.

For many years, I’ve seen countless stock market portfolios hold either of these two companies—sometimes both. With the stock market and these positions at all-time record-highs, it is difficult to make the case that they’re worth accumulating at this particular point in time. But with a major retrenchment in the stock market, these stocks would certainly be worthy of consideration for long-term retirement portfolios.

Both companies backed their previously stated 2013 full-year outlooks.

A big pharmaceutical company that’s diversified into other complementary business lines is the way to go if you’re looking to make an investment in this sector. I’m a big believer in the long-term wealth-creating effect of dividend reinvestment. A company with partial dividend reinvestment is also attractive.

The stock market has shown it likes to stick with its winners. With any more upside, these two pharmaceutical giants—Johnson & Johnson and Abbott Laboratories—should keep ticking higher.

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