Dear Mr. Berko: The health care market has tanked because of potential health care reforms. I've got $106,000 to invest, long term, in a portfolio of pharmaceutical stocks. I want to be conservative, but I would also like to get some decent dividend income if possible. Could you recommend 10 or so pharmaceuticals that pay good dividends and have good potential for long-term gains? — LS, Minneapolis
Dear LS: The political rhetoric of both major-party presidential candidates, who are calling for lower health care costs and drug prices, has hurt valuations in the health care sector, causing many issues to trade below their higher valuations. The health care industry has been and continues to be richly supportive of both major political parties, and ongoing health care politics will continue to generate volatility in equity prices. Opposition to higher health care costs is primarily political showmanship and BS until the November elections. So there is a very low probability of any health care reforms passing into law.
Over the years, the billions gifted to our trusted congressmen by the American Medical Association, the American Hospital Association, drug companies, health insurers, equipment manufacturers, the biotechnology industry et al. guarantee that no meaningful reforms will become law. We have the best Congress that money can buy, which is why I remain bullish on the health care industry. The same political promises are made every four years, and health care executives understand this process. Therefore, management continues to redeploy capital for mergers and acquisitions. And low interest rates continue to encourage mergers and acquisitions because money has become so cheap. Now management can focus on more muscular pricing and vigorous profit potential via scale purchasing, cost reduction, key strategies and inversion. Include the demands from Obamacare and health care spending will continue its geometric growth.
I believe there's uncommon potential in health care funds such as Fidelity Select Biotechnology (FBIOX-$184), which traded at $295 a year ago, and T. Rowe Price Health Sciences (PRHSX-$64.33), which traded at $85 last year. I also like the BlackRock Health Sciences Trust (BME-$34.74) and the Invesco Global Health Care Fund (GTHCX-$25.99), which traded at $47 and $39, respectively, last year. FBIOX, PRHSX and GTHCX are no-load funds, whereas BME is a closed-end fund, and you can buy 300, 500 or 1,000 shares for an $8 commission at Fidelity.
I also recommend AstraZeneca (AZN-$33.15), yielding 4.5 percent, and GlaxoSmithKline (GSK-$43.36), with a 5 percent yield, more than double that of the Standard & Poor's 500 index. I've discussed both issues in previous columns. Both have lost important patent protection, but both have sufficient earnings to maintain their dividends, and both have fecund pipelines, which should ensure continued growth in revenues, earnings and dividends. And in this market, I don't mind getting an average 4.75 percent dividend while waiting for those two to turn around. I'd also add Pfizer (PFE-$35) to your health care portfolio. I recommended it last year. Its $1.20 dividend, yielding 3.4 percent, has tripled since 2000.
Then add Sanofi (SNY-$38.70), a $38 billion global drug company with a $1.66 dividend, yielding 4.3 percent. Wall Street estimates a five-year growth rate of 7.1 percent. Credit Suisse, Value Line and S&P Capital IQ have "buy" ratings on SNY, with a three-year projected price target of $62. AbbVie (ABBV-$64.21), yielding 3.4 percent, is a $26 billion-revenue research-based pharmaceutical company that was a spinoff by Abbott Laboratories in 2013. ABBV expects to earn $5 a share this year and $6 next year, and Credit Suisse, Morningstar, Argus Financial Services, Thomson Reuters, S&P Capital IQ and Market Edge have a "buy" rating, with a three- to five-year target price of $140 to $150. However, Societe Generale has a "sell" recommendation on ABBV, and Morgan Stanley recently downgraded the stock. Novartis AG (NVS-$79.82) is a financially strong $49 billion-revenue pharmaceutical with a $2.85 dividend, yielding 3.5 percent. Earnings should be up significantly in 2016, to $4.20 from $3.25. Its new drug Entresto, approved to treat chronic heart failure, has blockbuster potential, earning perhaps $4 billion or more in annual sales. The Street has a three- to five-year $125 target price. Credit Suisse, Thomson Reuters and Market Edge have "buy" signals on NVS, while Morgan Stanley regards NVS as a "sell."
Hope this helps.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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