Income expert Kelley Wright uses a time-tested system to determine a stock's undervalued or overvalued levels, based on historic patterns of dividend yields. Here, the editor of Investment Quality Trends reviews two undervalued blue chips in the pharmaceutical sector.
Abbott Laboratories (ABT) has been considered a DID stock (meaning dividend in danger) for a while, as their dividend has been higher than its trailing months earnings.
Like most Select Blue Chips that go into DID, however, we see that their earnings are recovering and they should have this condition cured shortly.
This is pretty impressive given that they overpaid for their recent acquisition of St. Jude Medical. The pharma sector as a whole has been in the doldrums, give or take the one or two institutional favorites.
If the market were to retreat from its highs because of economic concerns, defensive sectors like big pharma could start to get some attention.
Pfizer (PFE) reduced their dividend in 2009 and 2010, but since 2011 it has stabilized and is back on an upward trend. At close to 4% the dividend is fairly attractive in the current interest rate environment.
Their annual earnings year-over-year were quite good, which is a welcome positive for the company. As with ABT, PFE is another big pharma stock that hasn’t been on investors radar screen. With improving earnings and an attractive dividend yield the table is set for that to change.
We’re entering an interesting stage in the market. Many of the economic projections made in the Quarter 4 of 2016 and earlier this year are being revisited. This can make for a dull market, but I wouldn’t get too sanguine about the lack of volatility.
Mr. Market has a tendency to lull investors to sleep in the summer months. So, pay attention, you never know when you will get handed a gift or two.
