A recent European Investment Strategy Special Report concludes that long term investors should have a core exposure to European pharma.
According to Benjamin Graham’s definition of the Holy Grail of long term equity investment, the pharmaceutical sector perfectly meets the criteria of growth with stability. Over the last forty years, dividend per share growth in the pharmaceutical sector (12% pa) has far outstripped that in the overall equity market (7%), as well as nominal productivity (6%) and inflation (4%). Furthermore, the dividend stream from pharmaceuticals has hardly ever declined in nominal or real terms, even in recessions. Spending on healthcare and pharmaceuticals is defensive. This has made the income growth from a portfolio of pharmaceutical shares rather like a supercharged inflation linked bond - growing much faster than inflation in the long run, but rarely declining. Normally, the market would offer a low starting yield for this combination of superior growth with downside protection. But remarkably, the dividend yield from a European pharmaceutical portfolio now stands at a mouth watering 4%, well above the 3% offered by the overall market, and way ahead of the pitiful 0.1% from U.K. index linked gilts. Our European Investment Strategy service believes that pharmaceutical patent expiries are a much smaller threat in Europe than in the U.S. Hence, the 4% yield on offer amidst a backdrop of near zero interest rates makes European pharmaceuticals fundamentally cheap. Long term equity investors should see this as a great buying opportunity. Multi-asset class investors should go long European or U.K. pharma, and short U.K. index-linked gilts.
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