Wednesday, February 22, 2017

ABT and AMGN added to big pharma analysis for 2017

This post finishes up my analysis of large pharmaceutical stocks.  

I am trying to decide if a large cap pharmaceutical company should be my next 2017 Dividend Machine.   My two previous posts on this subject included  analysis of Pfizer, symbol PFE; AbbVie, symbol ABBV: Merck, symbol MRK; Eli Lilly, symbol LLY: Bristol-Meyers, symbol BMY; and Johnson and Johnson, symbol JNJ. In this post I add Abbott Labs, symbol ABT; and Amgen, symbol AMGN.   

  • How do ABT and AMGN compare with the other big pharma stocks?
  • Do any fundamentals stand out among these pharmaceuticals?
  • How much does a dollar invested buy in revenue, earnings, and dividends?
  • Can you buy one or more of these stocks and retire with income that grows?

Let's get right to the fundamentals of the two stocks I write about today.  First is Abbott Labs.


Abbott Labs. has two strikes against it.  Their yield is less than the 2.75% I seek.  Their yield of about 2.4% is commensurate with the 10 year U.S. Treasury  yield.  I am confident that over the next ten years I would rather have a stock that yields 2.4% than a U.S. bond.  You cannot buy that bond at a discount and in ten years I find it hard to believe that deflation would lead to a U.S. bond fetching more than par plus yield.

The second strike is their EPS (earnings per share.) EPS over the past  are less than the dividend paid out.  But EPS is a fickle measure.   A good stock can be eliminated immediately when EPS are less than dividends paid out.

One time charges can make current EPS look bad but that very move may be what was needed for the stock to move forward.  Therefore, I look for a trend in EPS versus dividends paid out to decide if ABT should be eliminated or included.  Over the past many years, Abbott's earnings per share have exceeded dividends. In 2015 only 34.5% of earnings was paid paid out.  In 2014 the ratio was much higher 60% and in 2006 the pay out ratio was 52%.  The point is that ABT cannot be eliminated on the simple metric of ratio of earnings paid out in dividends.

The low yield could be supplemented with covered calls.  They are not robust  which makes me think I cannot supplement my income with calls but that metric is really volatile and could change.  Low yield can also be offset by a vigorous dividend growth rate.  ABT's dividend growth rate is low.

All of my fundamental data on ABT are presented in the table below.


Amgen is probably more of a bio tech company than a big pharmaceutical.  But JNJ has a big consumer staple side to it so all comparisons are not equal.  We are looking for are a stock with the right fundamentals to deliver the income we need to quit working.  Let's look at AMGN.

Again we have a stock with a dividend yield that is less than our goal.  However, in this case the dividend growth stands out.  In January 2013 AMGN's dividend was $.47 and this year the dividend is $1.15.  That is a growth rate of nearly 50% per year over the past 3 years.

Will the rate of dividend increases continue.  Let's look at the revenue growth.  Is revenue growth keeping up with dividend growth?  Not even close, revenues increased by an average of 7.7% growth rate over the past 3 years. They did better on earnings per share growth at 18% per anum.

All of my fundamental data on AMGN are presented in the table below.


When I started work on this project, I felt pharmaceuticals were an under appreciated sector.  Since my first pass at data collection the eight stocks I looked at have increased in price by an average of just over 4%.  BMY leads with an 8.43% price increase and MRK is the laggard at 1.57% price increase. See the table below.

I have summarized each stock for the purpose of comparison and you can see how they compare in the table below.

Stand out Fundamentals

Positive stand out data are:

  • PFE's revenue per dollar 
  • ABBV's revenue per dollar
  • AMGN's revenue growth
  • ABBV's dividend growth
  • AMGN's dividend growth
  • ABBV's high yield
  • PFE's high yield
Only one of these stocks had a call option worth pursuing and that is BMY.  An April $50 strike price for $1.00 with vigorous volume makes the total return should BMY be called away about 10% as you should also receive the March dividend.

Negative stand out data are:

  •  ABBV's debt 
  • LLY's negative revenue growth
  • MRK's negative revenue growth
  • ABT's low yield
  • ABT's EPS less than dividend paid out 
  • PFE's EPS less than dividend paid out
I have to eliminate ABBV on the debt alone.  Once they start paying down that debt, I may revisit.  Since I need income that grows my preference is AMGN, PFE and JNJ.  If you want to invest in a stock with the most momentum then BMY with the vigorous calls would be your choice.  If you want value then PFE is the choice.

Knowing that I have but $100,000 to invest in the 2017 portfolio,  buying AMGN would  mean allocating more than 10% to this one stock.  With that in mind my selection of this group for the 2017 portfolio is Pfizer.  I can forgive the current dividend payout ratio because their history is to pay out less than they earn and their most recent quarters show higher earnings than dividends paid out.

I will add PFE to the portfolio tomorrow 2/23/2017 based on dividend yield and value.  Let's see how we do.

M* MoneyMadam