By Andrs Cardenal - June 6, 2012 | Tickers: ABT, LLY, GSK, JNJ, PFE | 0 Comments <\/p>\n
Andrs is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited. <\/p>\n
The stock market has become quite uncertain lately, the European crisis keeps getting worse every day, and economic data in the US is nothing to write home about. But investors need to keep their heads cool, volatility creates opportunity, and there is no necessity to assume high risks in order to capitalize on the opportunities created by economic hurdles. Big pharmaceutical companies are an attractive sector where solid businesses with strong cash flows and juicy dividend payments can be found in the current turmoil. <\/p>\n
The pharmaceutical business is quite resilient in the face of economic problems, so these kind of companies will not go bankrupt even if there is another recession in the short term horizon. Solid balance sheets and big dividend payments are another characteristic that may become very coveted in times of economic uncertainty. And valuations are attractive too; many of these companies have been getting cheaper through the last years due to investors concerns about patent expirations and thelack of new blockbuster drugs. <\/p>\n
Johnson & Johnson (NYSE: JNJ) is one of the safest companies in the sector, not only drugs are produced by this giant with a market cap of almost $170 billion, but Johnson & Johnson gets 40% of revenue from medical devices and diagnosis and another 23% from consumer products. The company is strongly diversified, both geographically and in terms of products, and although it has faced some quality control problems lately, Johnson & Johnson is a solid long term bet yielding a 3.9% in dividends and trading at a forward P\/E ratio of 11.3. <\/p>\n
Another strong business with an attractive dividend is Abbott(NYSE: ABT), which has reported strong quarterly profits lately. Abbott's plans are to separate the research-based pharmaceuticals from the medical products business in order to better focus research and capitalize growth opportunities, and this move could bring more visibility to the value of the companys operations. Abbott has a forward P\/E ratio of 11.3 and the company yields 3.4% in dividends, which leaves ample upside room in shares of this global business. <\/p>\n
Pfizer (NYSE: PFE) looks really attractive with a dividend yield of 4.1% and a forward P\/E of 9.2. The company is facing increased generic competition in the context of a more risk conscious FDA, which slows down the development of new products. However, Pfizer has more than 90 drugs in its pipeline, although it will take time and effort to develop new products, Pfizer has the resources and the economic scale to go through this transition successfully. The pharmaceutical giant also has an unrivaled commercial and distribution team with presence all over the world, which is a key competitive advantage versus other firms in the industry. <\/p>\n
Those willing to take some extra risk and venture into companies going through important patents expirations could consider a position in Eli Lilly (NYSE: LLY). The company is one of the most exposed to patent expirations, with more than 40% of current sales encountering generic competition between 2011 and 2013. But Eli Lilly is investing heavily to replenish its pipeline with research and development expenses in the neighborhood of 20% of sales, while most competitors spend around 15% of sales in R&D. <\/p>\n
The company has the financial resources to continue investing heavily to develop new drugs, and acquisitions are always another possibility to increase revenues in the future, management is also focused on cutting expenses in order to go through the transition with strong profit margins. Investors in Eli Lilly should expect a volatile ride in the following years, but with a forward P\/E below 11 and a dividend yield of 4.9% the stock is cheap and has a considerable potential for gains if management handles the patent loss problem in an effective manner. <\/p>\n
There are even better dividend yields in big European pharma companies, and some of them look really attractive from a long term perspective, even considering competitive pressures and economic problems in the old continent. GlaxoSmithKline (NYSE: GSK) is a global powerhouse with a diversified product base and solid profitability ratios, the company is facing some patents expirations, but at the same time it has strong prospects in new drugs. Paying 5.1% in dividends and trading at a forward P\/E barely above 10 the upside potential looks much better than downside risk in GlaxoSmithKline. <\/p>\n<\/p>\n
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The Right Medicine for Your Portfolio<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" By Andrs Cardenal - June 6, 2012 | Tickers: ABT, LLY, GSK, JNJ, PFE | 0 Comments Andrs is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited. The stock market has become quite uncertain lately, the European crisis keeps getting worse every day, and economic data in the US is nothing to write home about. But investors need to keep their heads cool, volatility creates opportunity, and there is no necessity to assume high risks in order to capitalize on the opportunities created by economic hurdles Continue reading