2 undervalued pharmaceutical stocks to buy now

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Ssome investors like their dividends. Fortunately for them, there are many large companies that can afford to pay their shareholders in cash each quarter. Pharmaceutical giants AbbVie (NYSE: ABBV) and GlaxoSmithKline (NYSE: GSK) boast of high and sustainable dividend yields which 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 in the next few years. Scientists working in a laboratory.

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Always off their peaks

AbbVie and GlaxoSmithKline have both been beaten in the past 12 months and continue to trade on their pre-COVID-19 crash highs in March 2020. Despite growing earnings and increasing its dividend over the course of In recent years, AbbVie is 9% below its high of $ 123 in 2018. GlaxoSmithKline, on the other hand, has been trading with some volatility for the past 12 months. After missing the target of a potential COVID-19 vaccine, the company’s shares are still trading around 50% below highs recorded in 1999.

As seasoned investors know, stock prices don’t tell the whole story. The fundamentals of these companies appear strong, and there have been no dividend cuts or huge drug patent cliffs to date.

Growing dividends

AbbVie has rewarded its shareholders enormously over the past few years with dividend increases. Shareholders holding AbbVie shares over the past five years have seen a compound annual growth rate of their dividends of 18.09%. In October 2020, AbbVie increased the dividend by 10%. The company’s 167% payout ratio reflects how it relies on its cash reserve (roughly $ 8.5 billion per year) to continue to reward its shareholders. AbbVie’s continued sales of drugs like bestselling Humira, Skyrizi and Rinvoq, suggest it could increase its dividend well in the future. AbbVie has increased its dividend by 225% since its spin-off from Abbott in 2013.

GlaxoSmithKline has increased its dividend over the past 10 years at a compound annual growth rate of just 0.39%. With the revenue loss due to the upcoming spinoff from its consumer health segment, management has signaled a potential dividend cut going forward. This will keep the payout ratio manageable (it’s currently around 70%), and will also allow more money to be spent on rebuilding its drug pipeline.

Simple and safe investments

AbbVie currently markets the world’s best-selling drug, Humira. Immunology grossed over $ 19.8 billion in 2020 and has been a major contributor to the company’s success in recent years. AbbVie exceeded analysts’ expectations for total revenue last year, posting 37.69% year-over-year growth in 2020. The pharmaceutical industry median for revenue growth from 2019 to 2020 was only 4.69%. In view of this, I think the company is actually trading at a discount. AbbVie’s current price-to-earnings (P / E) ratio of around 9 is below its high of 10.4 at the end of 2020.

GlaxoSmithKline has managed to separate itself from the crowd in part by being a major player in the vaccine, HIV and respiratory tract sectors. GSK’s HIV segment grossed $ 6.5 billion last year. GlaxoSmithKline sells other notable drugs like Advair, which combines two of its other asthma products, Flovent and Serevent. Breathing is its largest segment, grossing over $ 9 billion in 2020.

Going forward, as the company abandons its consumer health business and focuses on research and development, earnings per share are expected to decline as the company temporarily loses sales. GlaxoSmithKline has also traded at very cheap valuations compared to historical averages. In 2019 alone, we saw the company trade between 15 and 20 times its profits. If we take a P / E ratio of 15 and multiply it by the 2020 earnings per share, we would get a share price of around $ 47. This represents a possible price appreciation of 27%, more than enough to beat the market if GlaxoSmithKline can reach old levels.

GlaxoSmithKline currently sports a 5.6% dividend yield while AbbVie offers a return of 4.4%. Related to ETF SPDR S&P 500, which only returns 1.3%, these two companies excel more than just providing dividend income. Still below their all-time highs, these two companies can potentially generate above-market returns in terms of total share price appreciation, but can also outperform indexes when generating dividend income.

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Anirudh Shankar owns shares of AbbVie. The Motley Fool recommends GlaxoSmithKline. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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