BOSTON (TheStreet) -- Investors seeking steady dividends coupled with inflation-beating share appreciation may want to consider big drugmakers' stocks. They're expected to have as yet unrecognized growth potential from emerging market demand.
Investors are discounting the potential profit contribution from emerging markets because of their recent economic volatility and investors focus on the more dominant U.S. market, while there is also a misperception that operating profit margins coming from such markets are too low to matter, wrote Damien Conover, a Morningstar drug industry analyst, in a research report. "We expect this discount will dissipate as emerging markets' economies stabilize and their sales contribution increases."
Conover estimates that sales from emerging markets will represent 26% of Big Pharma's total sales by 2015, up from 19% in 2011, aided by rapid wealth creation in emerging-market countries that will drive demand for branded pharmaceuticals and a shift in companies' revenue mix as patent losses in developed markets result in their decline as a percentage of total revenue.
Conover cited seven top international drug-company stocks in his report, and they have dividend yields ranging from 2% for the German chemicals conglomerate
to 6% for drugmaker
Here are summaries of the seven biggest international pharmaceutical companies' stocks, arranged in inverse order of the number of analysts' "buy" ratings:
Bayer, the international German health-care and chemical conglomerate, with a market value of $63 billion, has three business units: health care, crop science; which makes pesticides and herbicides; and material science, which makes plastics materials. Health care provides half of the company's revenue and includes pharmaceuticals, vitamins, blood glucose monitors and animal-health products.
Its shares are up 28% this year and have a three-year, average annual return of 21.4%. Morningstar says Bayer "is one of the best positioned firms in emerging markets. It earned 32% of its health-care revenue from emerging markets in 2011, and recently restructured to facilitate significantly increased investment in the regions. We expect the sales contribution from emerging markets to grow to 43% by 2015."
The German company gets little U.S. analyst coverage. On July 31, it raised its 2012 revenue and earnings forecasts saying it expects revenue growth of 4% to 5% this year to about $48 billion, citing increased sales of crop chemicals and drugs as well as favorable exchange rates, which sent its shares to the highest price in more than four years.
AstraZeneca, based in the U.K. and with a market value of $59 billion, has a product portfolio that includes gastrointestinal, cardiovascular, respiratory and neuroscience therapies. Emerging markets made up 17% of revenue last year and less than 40% of revenue comes from the U.S.
Its shares are up 8% this year and have a three year, average annual return of 6.2%. Analysts give its shares one "buy" rating, one "buy/hold," six "holds," and one "weak hold," according to a survey of analysts by S&P.
S&P, which has it rated "sell," says it expects 2012 sales to decline about 12% from 2011's $32.3 billion, due in part to lower sales of the proton pump inhibitor Nexium, which faces increased competition. Analysts' consensus estimate is for earnings of $5.82 per share this year, and $5.89 per share next year, a 1% increase.
Sanofi, of France, with a market value of $110 billion, is among the world's largest drugmakers, producing a wide range of prescription pharmaceuticals and vaccines. Emerging markets accounted for about 30% of its sales of $49 billion last year. "The company was among the first to enter Russia (1970) and China (1982) as well as several other markets," which bodes well for its long-term prospects, said Morningstar.
Its shares are up 18.5% this year and have a three-year, average annual return of 11.8%. Analysts give its shares three "buy" ratings, one "buy/holds," and three "holds," according to a survey of analysts by S&P. Analysts' consensus estimate is for earnings of $3.75 per share this year, rising to $3.82 per share next year.
Abbott, with a market value of $104 billion, offers a wide range of prescription pharmaceuticals, infant and adult nutritionals, diagnostics and medical devices. Morningstar says the company "has shot up the ranks in emerging markets through acquisitions." In 2011, it invested $4.1 billion, or 10.6%, of sales, in research and development. Foreign sales accounted for 59% of total sales in 2011.
Its shares are up 20% this year and have a three-year, average annual return of 17%. Analysts give its shares five "buy" ratings, five "buy/holds," 11 "holds," and one "sell," according to a survey of analysts by S&P.
S&P has it rated "buy," with a $74 price target, a 12% premium to the current price. Analysts' consensus estimate is for earnings of $5.05 per share this year, rising 6%, to $5.36 per share, next year.
GlaxoSmithKline, with a market value of $115 billion, is one of the world's largest pharmaceuticals companies. Its dividend growth prospects and steady cash flow are relatively secure, given its huge list of patent-protected drugs. Its shares have yielded at least 4% annually since 2007.
Its shares are up 6.8% this year and have a three-year, average annual return of 11%. Analysts give its shares five "buy" ratings, four "holds," and one "weak hold," according to a survey of analysts by S&P.
S&P has it rated "sell" on valuation concerns given the ratings firm's outlook for slow sales over the next few years. Analysts' consensus estimate is for earnings of $3.75 per share this year and $4.08 per share next year, or 9% growth. About 17% of its sales come from emerging markets and "Glaxo is one of the best-positioned pharmaceutical companies in emerging markets, which should help drive growth over the long term," says Morningstar's Conover. "We project the company will grow sales in emerging markets at 8% annually from 2011 to 2015."
Bristol-Myers Squibb, with a market value of $53 billion, is one of the world's largest branded drug developers, with pharmaceuticals for cardiovascular and infectious diseases, cancer and psychiatric disorders. Foreign operations accounted for 35% of sales last year with emerging markets making up only 8% but has a long-term goal of 15%.
Its shares are down 7% this year, but over the past three years, its shares have an average annual return of 18%. Analysts give its shares six "buy" ratings, two "buy/holds," nine "holds," one "weak hold," and two "sells," according to a survey of analysts by S&P. Those same analysts expect it will earn $1.93 per share this year and decline by 4% to $1.86 in 2013.
Johnson & Johnson
Johnson & Johnson, with a market value of $189 billion, ranks as the world's biggest and most diverse health-care companies. It has three divisions: pharmaceuticals, medical devices and diagnostics, and consumer products. International sales accounted for about 56% of 2011 revenue. Morningstar's Conover said the company "has one of the lowest exposures to the emerging markets out of the entire Big Pharma group, but is slowly embracing the idea" and making foreign acquisitions. "We estimate Johnson & Johnson's emerging-market sales contribution to hit 13% in 2015 from 10% currently," he said.
Its shares are up 6.5% this year and 7.4% annually over three years. Analysts give its shares 10 "buys," five "buy holds," and 10" holds, according to S&P.
S&P has it rated "buy," with a $75 price target, which is a 9% premium to its current price. Analysts' consensus estimate is for earnings of $5.07 per share this year, rising to $5.47 in 2013, or 8% growth.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.