Wednesday, October 6, 2010

Why Now Is The Time To Buy Drugs

OK, so I’m not saying that you should go out and buy illegal drugs. I am saying that now is the time to start investing in drug companies.

The pharmaceutical sector has a number of compelling stocks that have been beaten down by bearish sentiment. Drug stocks are good investments because they have tons of cash, great balance sheets, and are paying out hefty dividends.

Here are three drug stocks that offer growth potential and a great dividend.

Johnson & Johnson
J&J is my favorite drug stock. Investors looking for safety should turn their attention to Johnson & Johnson. The stock trades at just under 11 times earnings and is the industry leader. The company has nearly $19 billion dollars in cash and $11 billion dollars in long term debt. The company is an earnings giant generating nearly $18 billion in free cash flow alone. That’s due to the company’s great product line which includes Listerine, Band Aids, Purell, Carefree, Stayfree, Splenda, Tylenol, Sudafed, Zyrtec, and Motrin. Don’t forget Johnson’s Baby lotion too. That doesn’t even include the company’s pharmaceutical products. With a 3.50% dividend yield and a share price of $60, Johnson & Johnson is the cash cow of the industry.

GlaxoSmithKline (GSK)
GlaxoSmithKline makes products to treat just about every physical ailment including asthma, cancer, diabetes, infections, and mental illness. The drug maker has recently had a number of drugs come off patent over the past few years. The company has been able to maintain its revenue base despite those losses. GlaxoSmithKline’s shares are currently yielding 4.60%. GlaxoSmithKiline has over $10 billion in cash on its balance sheet. GlaxoSmithKline makes Advair, Aquafresh, Boost, Nicoderm, Nicorette, Tums, and Zantax. The stock currently trades at 12 times earnings which is a bit high based on its modest rate of growth.

Bristol-Myers Squibb (BMY)
This is a stock that carries some risk. Investors soured on this pharmaceutical giant due to an accounting scandal a few years ago. It appears that Bristol Meyers has gotten its financial house in order since the ouster of its CEO. Bristol-Myers is attractive for its dividend. The stock may be forecasting anemic growth but the stock has a great dividend yield. Shares are currently yielding 4.70% .Bristol-Myers Squibb is trading at 13 times earnings and the company has several new promising drugs in its pipeline. Ipilimumab, Belatacept, Apixaban, Brivanib, and Dapagliflozin are just a few of the drugs that Bristol-Meyers is working on.

Investors can also take a look at Merck, Pfizer, and Eli Lilly. The pharmaceutical industry is full of great stocks that are trading at low valuations. These stocks are out of favor because of fears of the new healthcare laws. I think that these fears are unfounded. With millions of additional Americans obtaining health insurance, these companies will have an even larger pool of clients to serve.

Does anyone else think that pharmaceutical stocks are cheap? If so, what companies are you investing in?

Photo by ionushi.

1 comment:

  1. Drug stocks are still a great place to be long term. The demand for drugs will only increase as time passes. A ageing population is just a gold mine for the drug companies. The only sector of the economy thats continued expanding is the healthcare sector. As the breadth and scope of new types of drugs increases so will the profit potential of the drug companies.


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