Big Pharma Dividend Stocks That Are Dragging Down Your Returns
Dividends are a great way to supplement capital gains, especially for large pharmaceutical companies that have more cash than they know what to do with. But dividends aren't enough in and of themselves to produce substantial gains.
Cheryl Swanson: British drug-maker GlaxoSmithKline now sports a massive yield of 5.2%, which, in this yield-parched world, could appear tempting. But Glaxo is a real return-killer, having largely missed the equity rally of the past six years. In fact, the stock price has dropped 16% in the past 12 months, truly terrible compared to the almost 18% gain of the overall pharmaceutical sector.
While Glaxo's Chinese bribery scandal is becoming old news, as 2015 progresses, the company keeps running into new foul ups. On April 16 Glaxo announced a recall of all remaining doses (1.7 million) of its four-in-one flu vaccine because of effectiveness problems. On April 24, potency issues were also reported with the company's malaria vaccine.
The recent vaccine snafus make the company's decision to send its high-margin oncology assets to Novartis (NYSE: NVS ) -- in exchange for the Swiss pharma's less-profitable vaccine business -- even more questionable. The $20 billion-plus asset swap was supposed to refocus Glaxo in its core area of expertise, as well as take up slack from its respiratory med business, and vaccines are expected to churn out 14% of company sales going forward.
But this past season's flu vaccines posted one of the worst efficacy rates in recent memory, so it's likely considerably fewer people will be lining up for jabs next year. Meanwhile, what about the dividend? Could it be cut? Glaxo paid out about 85% of its profit in dividends last year, the highest ratio among all Big Pharmas. While management has been scrambling to reassure investors the dividend is secure, with key drug Advair sales floundering and wannabee-blockbusters Anoro and Breo falling short of estimates, a dividend cut is not off the table for this stock, no matter what management says. Dividend dogs have their appeal, but this seems destined to remain a real howler. I'd stand well clear.
