Investors can generate passive income with these three stocks from the pharmaceutical industry. Which stocks are now becoming interesting through dividends.
Most recently, one interest rate hike by the American Federal Reserve followed the next, and the risk of a recession has increased. Many stocks from the pharmaceutical and healthcare sector are considered to be particularly resilient in economically weak market phases, as people usually do not save on spending on their own health. With these three stocks from the healthcare sector, investors can benefit from above-average dividends and growth opportunities.
GSK invests heavily in research and development
The British group GSK (formerly GlaxoSmithKline) develops, produces and markets medicines, vaccines and hygiene products. The company is investing heavily in research and development, accounting for 13 percent of sales in 2022. The stock is currently trading at a price-to-earnings ratio of 8.3, its lowest valuation on a P/E basis in almost a decade. The historical average is a P/E of 13. The cheap valuation reflects the low near-term growth prospects and the impact of inflation on the stock’s valuation, as high inflation reduces the present value of future earnings. Also, GSK’s earnings have fluctuated in recent years, mainly due to some patent expirations and sharp fluctuations in exchange rates. For example, asthma drug Advair’s patent expiration in 2019 took a toll on the company’s results over the next two years. On the other hand, GSK’s other respiratory medicines are showing strong growth rates. The company also has several vaccines that are seeing strong sales growth. At over four percent, GSK pays a handsome dividend.
Organon & Co. is favorably valued
The Merck spin-off Organon & Co. offers products from the field of reproductive medicine, hormone replacement therapies and painkillers, among other things. In all, the company produces nearly 50 products that continue to produce high cash flow even though they have lost their exclusive patent rights. Organon wants to generate new growth with a drug that is mainly used to treat rheumatoid arthritis. At 4.6 percent, the American company also pays a handsome dividend, and the profit payout ratio is 26 percent. With a price-earnings ratio of 5.5, the stock is also extremely cheap.
27 consecutive years of dividend increases
The French company Sanofi is one of the major players in the pharmaceuticals industry and is particularly successful with drugs for relatively rare diseases such as autoimmune diseases. Some of these products, such as Dupixent, an anti-dermatitis treatment, are just beginning to gain traction. For the past nine years, the company has grown its earnings per share by an average of 7.4 percent per year. Given the promising growth prospects for some of its products, Sanofi is expected to grow its earnings per share in the mid-single digits in the coming years. Also, Sanofi has increased its dividend for 27 straight years and currently offers a dividend yield of four percent. Thanks to its healthy 44% payout ratio and solid balance sheet that’s nearly debt-free, the company will likely be able to keep increasing its dividend for many years to come. The stock’s P/E valuation is 10.7, well below the historical average of 16.
Income investors should always try to identify stocks that have potential in the current market environment. This also applies in the current market phase, in which the risk of a recession has increased significantly due to the unprecedented rate hikes by the central banks. Investors could be on the safe side with stocks from the defensive pharmaceutical sector.
Also read: 10 ‘perfect’ safe-haven stocks for a choppy market
Notice of Conflicts of Interest
The CEO and majority owner of the publisher Börsenmedien AG, Mr. Bernd Förtsch, has taken direct and indirect positions on the following financial instruments mentioned in the publication or related derivatives that may benefit from any price development resulting from the publication: GlaxoSmithkline plc
