Dividends are great. They're a reliable source of passive income for retirees (and others) or can help boost long-term returns for investors who choose to reinvest them. But what happens when a company decreases or suspends its payouts? No investor wants to run into this problem.
One way of avoiding this is by investing in corporations likely to continue growing their dividends for a long time to come. Let's look at two examples: Amgen(NASDAQ: AMGN) and Pfizer(NYSE: PFE).
Things have been challenging for Amgen in the past few years. The biotech giant is seeing some of its formerly bestselling drugs lose steam due to stiff competition, leading to sluggish top-line growth.
The company has earned approval for newer therapies, including asthma treatment Tezspire. But Amgen's new product portfolio isn't strong enough yet to drive strong sales growth.
So what makes the biotech an excellent dividend growth stock? First, Amgen isn't the first drugmaker to go through a period of slow revenue growth and won't be the last. The company can bounce back, provided it improves its lineup, and it's working on doing exactly that.
In December, Amgen announced it would be acquiring Horizon Therapeutics for $28.3 billion in cash. Horizon focuses on developing medicines for rare autoimmune diseases. It boasts over 20 pipeline programs and about half a dozen approved products. The transaction will provide Amgen with greater depth and breadth.
While the government initially sought to block the acquisition, Amgen was able to address regulators' concerns and now expects to close the deal sometime during the fourth quarter. Of course, Amgen won't just depend on this acquisition to rejuvenate its lineup. The company's existing pipeline features over two dozen programs, including some brand-new clinical compounds.
Amgen is also making a push within the biosimilar market. It's developing potential substitutes for blockbuster drugs such as Regeneron's eye medicine Eylea and Bristol Myers Squibb's cancer therapy Opdivo, among others. Most Americans think prescription drugs are too expensive, so there's ample room for cheaper options, such as the ones Amgen is developing.
While this market is highly competitive, Amgen won't entirely -- or even primarily -- rely on its biosimilar unit to drive sales growth. It's just one of the many opportunities available to the company that could move the needle in the right direction. The point, though, is that Amgen isn't dead in the water despite its issues.
The company's innovative potential and the billions in yearly earnings should allow it to improve its business in the coming years. Amgen has increased its dividend by 61% in the past five years and currently offers a competitive yield of 3.26% and a reasonable cash payout ratio of 45%. Lastly, the company's current forward price-to-earnings (P/E) ratio of 14.3 looks reasonable, compared to the average of 15.3 for the biotech industry.
That's why Amgen's shares are worth buying today for income-seeking investors.
Pfizer's business is strengthening, even as its share price is dropping like a rock. What gives?
On the one hand, investors are disappointed that Pfizer's COVID-19 sales are falling off a cliff. However, this is hardly surprising. We're no longer in the same extreme state of emergency we experienced in the earlier pandemic years. But the outbreak isn't over. Cases of COVID-19 are climbing again.
While Pfizer's coronavirus portfolio may never experience the success it did in 2021 and 2022, it could continue to contribute meaningfully to the company's top line. It's important to keep that in mind. The company recently earned approval in the U.S. for an updated COVID-19 vaccine that targets the latest rising strains of the virus.
But beyond its coronavirus-related unit, how is Pfizer's business getting stronger? In at least two ways.
First, Pfizer has been on an impressive string of approvals that should continue well into next year. Some of the company's latest medicines are breaking new ground. Its respiratory syncytial virus vaccine Abrysvo was only the second ever to earn the green light in the U.S. -- the first beat Abrysvo by less than a month.
Pfizer's Litfulo became the first treatment for severe alopecia areata -- an autoimmune disease -- approved by the U.S. Food and Drug Administration for adolescents. Second, the company has also made a series of acquisitions, culminating in its massive $43 billion buyout of cancer specialist Seagen. Pfizer has substantially improved its lineup and pipeline in recent years, something that should pay rich dividends down the road -- literally.
The company has increased its payouts by 20.6% in the past five years, which isn't huge but isn't insignificant, either. Pfizer's dividend yield of 4.83% is excellent, although its cash payout ratio of 85.4% looks high.
Still, investors shouldn't worry as the company is more than capable of generating the earnings and cash flow necessary to cover -- and even increase -- its dividends. Lastly, Pfizer's shares look dirt cheap, with a forward price-to-earnings ratio of 10.3.
Dividend-seeking investors should strongly consider initiating a position in Pfizer before the company recovers.
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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb, Pfizer, and Seagen. The Motley Fool recommends Amgen. The Motley Fool has a disclosure policy.