It looks like politics is shaking up the healthcare industry. Several blue-chip healthcare stocks have been on the slide in recent weeks. The cause? It could be the recent nomination of Robert F. Kennedy Jr. as the Secretary of Health and Human Services for the incoming Trump administration.
Throughout the election cycle, Kennedy has been vocal about his desire to make big changes at several agencies, including the Food & Drug Administration (FDA). This has introduced uncertainty for businesses that work with the agency, especially pharmaceutical companies.
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While it remains to be seen what will come of all this, the fear has knocked some prominent dividend-paying healthcare companies down to appetizing valuations that long-term investors should consider taking advantage of.
Here are three compelling buys to look into today:
1. AbbVie
Shares of pharmaceutical giant AbbVie(NYSE: ABBV) are currently trading down over 18% from their high. But it's not just political angst dropping the stock; AbbVie paid $8.7 billion to acquire Cerevel last year, seeking the company's pipeline of psychiatric drugs. However, Cerevel's schizophrenia drug emraclidine unexpectedly failed its clinical trials, raising severe doubts that AbbVie will get much return on that nearly $9 billion investment.
It's not ideal that such a promising asset has fallen on its face. Still, AbbVie is a well-diversified drug company with plenty of growing products that have helped offset the losses from Humira, a mega-blockbuster product that came off of its patent protection last year. Notably, the stock's fantastic dividend is on solid ground. AbbVie currently yields 3.7%, and its dividend payout ratio is just 56% of its estimated 2024 earnings. So, the failure of emraclidine hurts, but it doesn't make or break AbbVie.
The stock now trades at a forward P/E ratio of 15. Meanwhile, analysts estimate AbbVie's earnings will grow by an average of 8% to 9% annually over the long term. This is an opportunity to buy a top-notch dividend stock at a PEG ratio of 1.7, a solid deal for AbbVie's expected growth. Assuming the valuation stays roughly the same, investors could see growth and dividends combine for total returns averaging 11% to 13% annually over time.
2. Pfizer
The COVID-19 pandemic created a business boom for Pfizer(NYSE: PFE), but that's dried up, and the combination of declining earnings and sour industry sentiment has punished the stock. Shares now trade at less than 9 times earnings. Such a low valuation would imply that Pfizer, an industry giant, is on the ropes. The stock's 6.7% dividend yield is the highest it's ever been outside of the financial crisis in 2008-2009.
A high yield can signal trouble, but Pfizer is doing just fine. The company's dividend payout ratio is only 58% of its 2024 earnings estimates. Plus, Pfizer has pivoted its business to oncology, with a healthy pipeline and analysts calling for 10% to 11% annualized earnings growth over the next three to five years.
Investors can buy a well-funded, high-yield dividend stock at a bargain price in Pfizer. Management has committed to supporting and increasing the dividend. It seems sentiment may turn back in Pfizer's favor once all this political noise settles down, making Pfizer a contrarian stock idea with a high upside.
3. Johnson & Johnson
Medical device and pharmaceutical conglomerate Johnson & Johnson(NYSE: JNJ) is another stock that's steadily drifted lower in recent weeks. The stock is now 18% off its high and sits at 15 times Johnson & Johnson's 2024 earnings estimates. Plus, the company is still trying to resolve its talcum powder litigation, which could cost billions of dollars when it's all said and done. The sell-off makes sense in that light.
However, the critical takeaway with Johnson & Johnson is that these challenges likely don't dent the company's fantastic fundamentals and, thus, the stock's appeal to long-term investors. The company has over $20 billion in cash sitting on its balance sheet, and a large settlement would likely be paid out over many years, anyway. Johnson & Johnson is a Dividend King with a perfect AAA credit rating from Standard & Poor's. Corporate coffers don't get much deeper than Johnson & Johnson's.
Johnson & Johnson constantly innovates and acquires new assets to drive steady growth. Analysts estimate the company's earnings will grow by an average of 5% to 6% annually over the next three to five years. That alone should push the dividend higher, and that's without factoring in a pretty modest 50% payout ratio (based on 2024 earnings estimates). Johnson & Johnson isn't a get-rich-quick stock but offers a generous 3.2% yield and a continually growing dividend. That steady growth and ironclad balance sheet look pretty good at just 15 times earnings.
Should you invest $1,000 in AbbVie right now?
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie, Pfizer, and S&P Global. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.
