Pfizer Inc. (NYSE:PFE) was the top stock loved by hedge funds in 3Q and also pays a similar dividend yield to Merck at 3.8%. We continue to prefer Merck given its exposure to emerging markets and cheaper valuation when compared to Pfizer’s P/E (20x) and P/CF (11x). The long-term expected growth for the drug company is also lower than Merck at a 2% 5-year CAGR. Ken Fisher – founder of Fisher Asset Management – is one of Pfizer’s top shareholders (check out Ken Fisher’s newest picks).
AstraZeneca PLC (NYSE:AZN) is the smallest in terms of market value of the drug stocks listed and also trades out of line from the other companies. With a 6% dividend yield – and a 58% payout ratio – this drug company is an immediate attention-grabber. Couple this with its 10x P/E and 7x P/CF – the lowest valuation metrics of our stocks listed here – and we would be interested in taking a deeper look. Be wary though, of the stock’s 5-year expected earnings CAGR of -4%. Billionaire Steven Cohen of SAC Capital was also dumping some of this pharma stock last quarter (see Steven Cohen’s top picks).
GlaxoSmithKline PLC (NYSE:GSK) is another high-dividend paying pharma company with a yield of 5.3%. We do remain cautious that the stock does not boast as robust valuation metrics at 14x earnings and 14x cash flow, but its 6% long-term growth rate places it on the level of AstraZeneca in terms of attractiveness. Billionaire Warren Buffett is one of Glaxo’s big name investors with over 1.5 million shares (check out Warren Buffett’s new picks).
Johnson & Johnson (NYSE:JNJ) is similar to Merck in that we see growth potential thanks to its diverse drug/product portfolio and ability to tap the emerging markets. Johnson & Johnson pays a solid dividend yield at 3.5% and has one of the highest expected growth rates. Part of the reason we like Merck over Johnson & Johnson is that the latter has industry-high P/E and P/CF ratios, at 22x and 16x respectively. Billionaire George Soros was upping his stake over 1500% last quarter, though, so there is some support from the smart money (see all of George Soros’ big bets).
Merck is one of our top picks in the pharma industry as an underrated growth stock that pays a very solid dividend in a low-rate environment. The pharma company’s 19x trailing P/E is relatively in line with the industry, but its 12x forward P/E suggests investors are under-appreciating its growth prospects. If investors placed a 19x forward multiple on this year’s full year EPS estimates, the stock would trade upwards of $70, compared to its current share price in the $40 range. Continue reading about Merck in some of our recent coverage:
Merck Is One Of Billionaire Stanley Druckenmiller’s 5 Dividend Picks
Merck Is One Of 3 High-Yield Pharma Stocks With A Big Catalyst
