Dividend Comparison – Pharmaceuticals

The pharmaceutical industry is one of the most profitable industries where they have a huge margin on their products. The figure below is taken from Jeff Gundlach’s What in the World is Going On? presentation from Jun 4, showing the relative profitability between various industries.

Profitability by industry

I hold some of my equity in mutual funds which I am planning on selling in the near future. The mutual fund is a globally diversified healthcare fund, which holds equities in medical equipment and pharmaceuticals. Once I sell the mutual fund, I intend to pick up shares of individual companies in the medical equipment and the pharmaceutical industry. This post of dividend comparison gives an overview of the pharmaceutical industry.

Withholding Tax

The foreign company ADRs withhold a tax rate depending on the country of origin. For each of the entries below, I have added a country listing and the withholding tax rate associated. The number in the column indicates the withholding tax rate if the security is held in a RRSP registered account. Note that the withholding tax is zero for all US and UK companies due to the tax treaties between those countries and Canada. The number in the brackets is the withholding tax rate if the security is held in a TFSA or other non-registered accounts.

Drug Manufacturers – Major (Big Pharma)

The following companies are the Big Pharma drug manufacturers with a market cap of $2B+. The list excludes one other major manufacturer (Roche Holdings AG) – excluded due to the fact that it trades in the OTC market.

Company Name Ticker Quote P/E Yield Payout Ratio 5-yr DGR Country Withholding Tax
AbbVie ABBV $43.91 12.95 3.64% 59% USA 0% (15%)
AstraZeneca AZN $48.94 10.83 5.72% 61.9% 8.41% UK 0% (15%)
Bristol-Myers Squibb BMY $44.86 50.98 3.12% 156.8% 2.81% USA 0% (15%)
GlaxoSmithKline GSK $52.29 21.00 4.49% 66.5% 1.55% UK 0% (15%)
Johnson & Johnson JNJ $89.24 24.25 2.96% 64.7% 7.87% USA 0% (15%)
Eli Lilly & Co LLY $51.42 12.33 3.81% 47% 1.83% USA 0% (15%)
Merck & Co MRK $47.96 24.47 3.59% 84.9% 2.38% USA 0% (15%)
Novartis AG NVS $72.30 18.49 3.36% 58.1% 9.56% Switzerland 15% (35%)
Novo Nordisk NVO $161.56 22.69 1.97% 31% 27.26% Denmark 15% (28%)
Pfizer PFE $28.44 20.17 3.38% 38.5% -5.49% USA 0% (15%)
Sanofi SA SNY $50.99 25.50 3.52% 88.3% 1.89% France 15% (25%)

Drug Manufacturers – Other

The pharmaceutical companies listed here are $2B+ drug manufacturers classified as Other. They are either a specialty or generic drug manufacturers.
Company Name Ticker Quote P/E Yield Payout Ratio 5-yr DGR Country Withholding Tax
Allergan Inc AGN $89.32 23.88 0.22% 4.3% 0% USA 0% (15%)
Dr. Reddy Labs RDY $37.49 22.86 0.71% 15.2% 28.03% India 25%
Teva Pharmaceuticals TEVA $38.77 19.39 2.91% 56.1% 20.1% Israel 15% (20%)

My Thoughts

Some of the Big Pharma like BMY ┬áhave their payout ratios completely out of whack and are currently very expensive at a P/E ratio of 50.98. Staying away from that is a no-brainer as a dividend cut is more probable than not. There are some gems in the Big Pharma industry which are attractively valued such as AZN and NVS, and have a decent 5-yr DGR. However, there are few more considerations that need to be accounted for – including the withholding tax rate. Past performance does not guarantee future trends as each company’s drug portfolio needs to be considered. How many profitable drugs are going off patent in the near future resulting in loss in revenue? If there is a blockbuster drug coming off-patent, how much was it contributing towards the previous year’s revenue? How many new drugs are on their way? Pre-clinical vs. clinical trial stage of the drugs etc.

Disclosure: My healthcare mutual fund holds various big pharma stocks. I do not own any individual stock.

Image source: Jeff Gundlach’s What in the World is Going On? presentation from Jun 4, 2013.

Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.

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