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Daily Traders Edge

2 Undervalued Pharmaceutical Stocks to Buy Now

April 29
10:43 2021

Some investors love their dividends. Lucky for them, there are a lot of great companies that can afford to pay their shareholders cash every quarter. Pharma giants AbbVie (NYSE:ABBV) and GlaxoSmithKline (NYSE:GSK) boast high and sustainable dividend yields that are great for investors who want to see those dividends hit their account every three months. As a bonus, both stocks are undervalued today, and I think their total returns could outperform the market over the next few years.

Still off their highs

Both AbbVie and GlaxoSmithKline have been beaten down over the last 12 months, and are still trading off of their highs from before the COVID-19 crash in March 2020. Despite growing earnings and raising its dividend over the past few years, AbbVie is 9% below its 2018 high of $123. GlaxoSmithKline, on the other hand, has been trading with some volatility for the past 12 months. After missing the mark on a potential COVID-19 vaccine, the company’s shares still trade about 50% below the highs set back in 1999.

As seasoned investors know, stock price doesn’t tell the whole story. These companies’ fundamentals look solid, and there haven’t been any dividend reductions or huge drug patent cliffs encountered so far.

Growing dividends

AbbVie has rewarded shareholders tremendously over the past few years through dividend increases. Shareholders holding AbbVie stock for the last five years have seen a compound annual growth rate on their dividends of 18.09%. In October 2020, AbbVie increased the dividend by 10%. The company’s payout ratio of 167% reflects how it leans on its cash stash (of about $8.5 billion per year) to continue rewarding shareholders. AbbVie’s continued sales from drugs like best-selling Humira, Skyrizi, and Rinvoq, suggest that it could grow its dividend well into the future. AbbVie has increased its dividend by 225% since its spinoff from Abbott in 2013.

GlaxoSmithKline has grown its dividend over the last 10 years at a compound annual growth rate of just 0.39%. With the lost revenue from the soon spinoff of its consumer health segment, management has signaled a potential dividend cut in the future. Doing this will keep the payout ratio manageable (it’s currently around 70%), as well as allow more cash be directed to rebuilding its pipeline of drugs.

Continue Reading at The Motley Fool

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