One of the greatest enemies of investors is trading too frequently. Jumping in and out of stocks too often dramatically reduces returns over the long run. That's why it pays to find stocks that you can buy and hold onto for years.
Stocks that meet three criteria often make the best long-term picks. First, their valuations should be attractive. Stock valuations tend to revert to their means over time. Second, they should pay great dividends. Don't underestimate how important reinvested dividends are to total returns. Third, the stocks should have solid long-term growth prospects.
I think three big pharma stocks currently meet all of these criteria: AbbVie(NYSE: ABBV), Gilead Sciences(NASDAQ: GILD), and Pfizer(NYSE: PFE). Here's why these are three cheap dividend stocks that you can buy now and hold for years to come.
Man in a suit with hands behind his head and eyes closed while lying on a pile of cash
Image source: Getty Images.
1. AbbVie
AbbVie stock is definitely cheap right now. The big drugmaker's share price trades at a little over 10 times expected earnings, well below the S&P 500's forward earnings multiple of 16.7. With growth projections factored into the equation, AbbVie's valuation looks even more attractive. The stock's price-to-earnings-to-growth (PEG) ratio is a low 0.73.
The company also claims one of the juiciest dividends among big pharma stocks. AbbVie's dividend yield currently stands at 3.96%. Investors have enjoyed nice dividend increases every year since 2013 when AbbVie was spun off as a separate company. During that time, AbbVie hiked its dividend by a whopping 140%.
What about growth? Wall Street thinks that AbbVie's earnings will grow by more than 16% annually on average over the next five years. While sales for AbbVie's top-selling drug, Humira, will decrease in the future in the wake of biosimilar competition, it's still projected to be the No. 1 best-seller in the world in 2024.
AbbVie should be able to make up for Humira sales declines and still generate solid growth. Cancer drugs Imbruvica and Venclexta, hepatitis C virus (HCV) drug Mavyret, and recently approved endometriosis drug Orlissa (elagolix) are expected to be key to the company's fortunes. Market research firm EvaluatePharma ranks AbbVie's pipeline as the second-best in the industry, with potential blockbuster drugs including risankizumab and upadacitinib likely on the way.
2. Gilead Sciences
Gilead Sciences also looks inexpensive, with shares trading at 12 times expected earnings. But where the company's low enterprise value-to-EBITDA (EV/EBITDA) multiple of 7.35 really highlights Gilead's attractive valuation.
Although Gilead didn't initiate a dividend program until 2015, the company has prioritized returning profits to shareholders through dividends. Gilead has increased its dividend payout by more than 10% each year on average. The dividend currently yields a little over 3%.
Growth has been a challenge for Gilead in recent years due to sinking sales for its hepatitis C virus (HCV) franchise. The good news, though, is that the biotech expects HCV sales to stabilize in 2018 as it battles AbbVie for market share. This should cause investors' attention to shift more toward Gilead's HIV drugs. That HIV lineup now includes Biktarvy, which is likely to be the biggest new drug launched in 2018 and could be on the way to annual sales of $6 billion or more.
Gilead should be able to return to growth thanks to its strong HIV franchise, increased momentum for cancer drug Yescarta, and a promising pipeline. The company's late-stage rheumatoid arthritis candidate, filgotinib, should rake in at least $2 billion in peak annual sales and possibly significantly more with other indications. Gilead also could be a leader in the potentially lucrative non-alcoholic steatohepatitis (NASH) space with late-stage candidate selonsertib.
3. Pfizer
Pfizer stock trades at a little over 12 times expected earnings -- only slightly higher than Gilead's forward earnings multiple. Pfizer's EV/EBITDA multiple of 11.6 is also well below historical levels for healthcare stocks.
The company has been a favorite among income-seeking investors for a long time and still is with a dividend yield of 3.66%. Over the past five years, the drugmaker has boosted its dividend by nearly 42%. How important is Pfizer's dividend? Consider that the stock price doubled over the last 10 years. If you bought Pfizer 10 years ago and reinvested its dividends, though, you'd have a total return that tripled your initial investment.
Pfizer's revenue and earnings growth in recent years haven't been impressive. That's largely because of falling sales for drugs that have lost exclusivity and continued product shortages with its sterile injectables business. However, the negative impact from the older off-patent drugs should decrease over the next few years. Pfizer also expects to resolve the issues hurting its sterile injectables sales.
In my view, Pfizer has its best pipeline in years. The company thinks that it will win approval for up to 15 new drugs or new indications for existing drugs with blockbuster sales potential over the next five years. In addition, Pfizer's growth should continue to be fueled by big winners like anticoagulant Eliquis and cancer drug Ibrance, both of which EvaluatePharma ranks among the top five drugs with the fastest sales growth this year.
Only for long-term investors
If you're looking for stocks that will skyrocket in just a few months, AbbVie, Gilead Sciences, and Pfizer probably aren't for you. Some with short-term perspectives might worry that biosimilar competition for Humira in Europe could hurt AbbVie starting in the fourth quarter of 2018. They might fret if Gilead doesn't see HCV sales stabilization soon. They could be bothered if Pfizer's problems aren't resolved immediately.
But if you're a patient investor with a long-term mindset, these three big pharma stocks should be solid picks. Their valuations are certainly attractive, as are their dividends. I like the growth prospects for all three companies. Investors who buy and hold AbbVie, Gilead, and Pfizer stocks should win over the long run.
Keith Speights owns shares of AbbVie, Gilead Sciences, and Pfizer. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy.
