Dividend increase announcements continue to pile up as 2020 draws to a close. The health care sector remains one of my favorite places to find stocks offering solid yields and lengthy track records of dividend growth.
We will look at three health care companies that have recently announced dividend increases and whether or not they are a good buy at the moment.
Abbott Laboratories
Following its spinoff of AbbVie Inc. (ABBV, Financial) in 2013, Abbott Laboratories (ABT, Financial) has four reportable business segments: Medical Devices, Establish Pharmaceuticals, Diagnostic Products and Nutritional Products. The company has a market capitalization of more than $183 billion and generated revenue of nearly $32 billion last year.
On Dec. 11, Abbott Laboratories announced that it was increasing its quarterly dividend by 25% to 45 cents. Since separating from AbbVie, Abbott Laboratories has raised its dividend with a compound annual growth rate of 12.5%. The company has now increased its dividend for 49 years.
Based on annualized dividend of $1.80 and the recent price of $107.02, shares have a new yield of 1.7%. According to Value Line, the average yield over the last 10 years is 2.4%, so shares are throwing less than income than usual. The dividend is payable Feb. 16, 2021 to shareholders of record at the close of business on Jan. 15, 2021.
Analysts surveyed by Yahoo Finance expect that Abbott Laboratories will earn $3.55 per share in 2020. This gives the stock a forward price-earnings ratio of 30.1. The stock has traded with a price-earnings ratio of 20.3 since spinning off AbbVie. Shares would have to decline about 33% to trade with their long-term average.
GuruFocus also finds the stock is trading above its intrinsic value.
GuruFocus has a GF Value of $84.84, which means the stock is trading at a price-to-GF Value of 1.26 at the moment. This earns Abbott Laboratories a rating of modestly overvalued from GuruFocus. The stock would have to decline 21% in order to trade with its GF Value.
Shares of Abbott Laboratories has gained 23.2% year to date, better than the 13.4% return for the S&P 500 Index. This outperformance has played a part in the stock becoming overvalued compared to its own historical average as well as to its own intrinsic value. On the other hand, the company did raise its dividend by a rate of double that of its long-term CAGR. That said, this isn't enough for me to consider adding to my position in Abbott Laboratories. On a pullback, I would be much more interested in owning more of the company.
Bristol-Myers Squibb
Bristol-Myers Squibb Co. (BMY, Financial) is one of the largest manufactures of pharmaceuticals in the world. The company also produces diagnostics, infant formula and orthopedic implants. The company completed its acquisition of Celgene in November of 2019. Bristol-Myers is worth $137 billion today and posted sales of more than $26 billion in 2019.
The company announced on Dec. 10 that it was raising its quarterly dividend by 8.9% to 49 cents. The most recent raise is significantly higher than the 2.5% increase that Bristol-Myers has averaged over the last decade. This is the 12th year in a row that Bristol-Myers has increased its dividend.
Based on new annualized dividend of $1.96 and the most recent closing price of $60.26, shares offer a new yield of 3.3%. This is just below the 10-year average yield of 3.3%, but below the five-year average yield of 2.7%. The dividend is payable Feb. 1, 2021 to shareholders of record at the close of business on Jan. 4, 2021.
Bristol-Myers is expected to earn $6.38 this year, which gives the stock a forward price-earnings ratio of 9.4. Excluding two years (2014 and 2015) where the valuation multiple was extremely high, the stock has an average price-earnings ratio of 22.2 since 2010. I've stated previously that I have a targeted price-earnings ratio range of 13 to 15 for the stock. The stock continues to trade well below this target.
Bristol-Myers also looks undervalued using its GF Value.
The stock has a GF Value of $70.62, which results in a price-to-GF Value of 0.85. GuruFocus has a rating of modestly undervalued for shares of Bristol-Myers. The stock would return 17.2% were it to trade at this level. Factoring in the dividend yield, which would be 2.8% at the GF Value, Bristol-Myers has the potential to offer a total return of 20%.
Bristol-Myers has lost just over 5% in 2020, which trails the S&P 500 index by a wide margin. Still, shares trade at a discount to both my target valuation and Bristol-Myers' GF Value. The dividend yield is also attractive. I continue to believe Bristol-Myers is a solid option for purchase for those looking for exposure to the health care sector.
Pfizer
Pfizer Inc. (PFE, Financial) is a global pharmaceutical company that discovers, develops, manufactures and distributes a wide variety of medicines and vaccines. The company spun off its branded and generic drug business and combined it with Mylan N.V. to form Viatris Inc. (VTRS, Financial) in mid-November. Pfizer's Covid-19 vaccine received emergency approval from the Food and Drug Administration and has now begun shipping the product to sites in the U.S. The company is valued at almost $229 billion and produced sales of just under $52 billion in 2019.
Pfizer announced on Dec. 11 that it was raising its dividend 2.6% to 39 cents, which is lower than the 10-year CAGR of 7.2%. The company has now raised its dividend for the past 11 years. Pfizer did reduce its dividend in 2009 and 2010 in order to adsorb a large acquisition, but the company had raised its dividend for the 41 year prior to this cut.
Using the new annualized dividend of $1.56 and the current share price of $39.73, Pfizer has a yield of 3.9%. For context, the stock's 10-year average yield is 3.7%. The dividend is payable March 5, 2021 to shareholders of record at the close of business on Jan. 29.
Analysts expect Pfizer to earn $2.84 this year, giving the stock a forward price-earnings ratio of 14. Over the last decade, the stock has an average price-earnings ratio above 20, but I feel a multiple of 15 times earnings is more appropriate.
GuruFocus believes that Pfizer is trading above its intrinsic value.
Currently, Pfizer has a GF Value of $33.84. This means the stock has a price-to-GF Value of 1.17, which earns shares a rating of modestly overvalued. Pfizer's stock would have to decline almost 15% to reach its GF Value.
Pfizer has gained 7% in 2020, but much of this positive return took place in the very near term. Shares spent much of the year down considerably. The yield and dividend growth streak (52 annual increases in 54 years) are very strong. I might prefer a pullback before increasing my stake in the company, but the above-average yield could be appealing to those looking to initiate a position in Pfizer.
Final thoughts
Health care remains one of my favorite places to find dividend growth. Companies in this sector often have lengthy track records of dividend growth and many offer a high yield.
Bristol-Myers is the lone name on this list that appears to be an excellent value today and offer a high double-digit total return.
Abbott Laboratories is one of the premier medical device companies in the market, has a long history of dividend growth and just raised its dividend by an above-average figure. However, shares are expensive and I will likely wait before adding to my position in the company.
Following the divestiture of its generic drugs business, Pfizer is able to focus more on its growth businesses. The company did cut its dividend two consecutive years, but has increased its dividend every year since. Pfizer trades just below my target valuation, but above its GF Value. Personally, I would like a pullback before I add to my position, but those looking for exposure to health care might be enticed by the stock's yield.
Disclosure: The author maintains a long position in Abbot Laboratories, AbbVie and Pfizer.
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