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Pfizer Inc. (PFE), Merck & Co., Inc. (MRK) & More: Drug Stocks on Citi’s Dividend Buy List

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Barron’s recently posted Citi’s updated list of large, financially strong, high-yielding, dividend-paying companies. Three drug companies make the grade: Pfizer Inc. (NYSE:PFE), Merck & Co., Inc. (NYSE:MRK), and Bristol-Myers Squibb.

The Citi list

Every month, Citi creates a list of recommended companies with big yields. The list leans toward the large side of the market, with a minimum market cap of $10 billion required to pass the screen. The second criteria is to have a yield that is one percentage point more than the median yield of dividend payers (this is lower by a third from previous required levels). Next Citi uses credit default swaps to determine the companies that the market believes to be low risk.

The credit default swap angle is what makes the list so interesting, since it incorporates the market’s opinion of the company’s safety. The list is always full of great names. The April incarnation had three drug companies that investors might find interesting, though their outlooks differ greatly:

Pfizer

Pfizer has made some big changes in recent years. For starters, it sold its nutrition business to Nestle. Then it spun off its animal health division. These moves were an effort to become leaner, and help management focus on its core drug business. Of course the extra cash hasn’t hurt either. And it hasn’t just been shedding businesses, it also recently purchased Wyeth to help solidify its core.

3 Drug Launches You Need to Know in 2013: Pfizer, NPS Pharma, Ariad PharmaLike all of the drug makers, Pfizer Inc. (NYSE:PFE) has been living under the cloud of patent expirations. With a stable of blockbuster drugs already facing or set to face generic competition soon, it is reasonable that investors would be concerned about the company’s earnings. A dividend cut a few years back certainly doesn’t help matters.

However, Pfizer is among the largest drug companies in the world. This gives it notable advantages in research and development, a costly and time-consuming process. One of the biggest benefits is that Pfizer can easily afford to have multiple research efforts going at the same time. In fact, the company appears to have a pretty decent pipeline in late stage development—partially thanks to the Wyeth addition.

Although you can’t count your chickens until they’ve been approved by the FDA, Pfizer Inc. (NYSE:PFE) is a well run company with good prospects. Its 3% or so dividend yield should interest conservative investors.

Merck & Co., Inc. (NYSE:MRK)

Like Pfizer, Merck has used an acquisition to solidify its core drug business. In this case, the acquisition target was Schering-Plough. It was a good purchase for Merck, which faced a far hazier future without the addition of Schering’s drug pipeline. The combination should also allow for notable cost savings to be realized.

While a big purchase was somewhat out of character for Merck & Co., Inc. (NYSE:MRK), it really didn’t have much of a choice. In fact, even with Schering, Merck’s expirations remain a notable concern. That said, it still has some big drugs and vaccines to rely on while it works candidates toward approval.

While Merck & Co., Inc. (NYSE:MRK) is a good company, its top line has been fairly stagnant for years (the Schering purchase led to a huge one-year jump, but not consistent growth). The dividend, though increased recently, was also stagnant for years. While offering a nearly 4% dividend yield, this probably isn’t appropriate for conservative investors. Middle of the road types willing to own a good company working through a rough patch might find it appealing.

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