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For investors seeking to enhance their passive income, the pharmaceutical sector presents intriguing opportunities. Currently, shares of Merck (MRK -0.88%) provide a yield exceeding 3%, while Pfizer (PFE -0.35%) boasts a yield greater than 6%.
This raises an important question: which of these two high-yield dividend stocks stands out as a preferable option for investment? To answer this, we will examine the strengths and weaknesses of each company, helping to determine which may be the superior buy at this time.
Evaluating Merck
Merck’s stock has experienced a decline of approximately 34% from the highs recorded last year. The driving force behind this downturn is the anticipated expiration of patent protections for its flagship cancer immunotherapy, Keytruda, which is expected to face competition in the U.S. and China by 2028.
In Europe, Keytruda’s patent is set to expire in 2031, leaving the company vulnerable to biosimilar competition. While Keytruda’s sales soared by 19% year over year to an impressive annualized $31.3 billion in the fourth quarter, this figure represents just over half of Merck’s total revenue.
Despite the recent decline in stock value, Merck’s current stock price offers a higher dividend yield than typically associated with the pharmaceutical company, currently at around 3.7%.
Last March, the FDA approved Winrevair, a medication for adults with pulmonary arterial hypertension. Sales for Winrevair have shown potential with an annualized figure of $800 million in the fourth quarter, which may help mitigate some of the expected losses from Keytruda. Analysts predict that Winrevair’s sales could reach $4 billion by 2029.
Generally, biological drugs like Keytruda witness a significant drop—around 50%—in sales within the initial years post-patent expiration. Given that Keytruda’s annual sales are currently above $31 billion, Merck will require the successful launch of additional high-revenue drugs akin to Winrevair to sustain its dividend growth following the patent cliff. Unfortunately, Merck’s pipeline beyond Winrevair lacks substantial headline-making drugs.
The most promising candidate in Merck’s development slate is a cholesterol medication referred to as MK-0616, which recently entered Phase 3 trials involving 17,000 patients. Initial results from these trials are anticipated soon. MK-0616 is an oral PCSK9 inhibitor, a class of drugs already making waves, as seen with Amgen’s Repatha, which reported a 36% sales growth to $2.2 billion last year. Nevertheless, Merck will need to deliver more blockbuster drugs to maintain its dividend trajectory as Keytruda faces patent challenges.
Analyzing Pfizer
Pfizer’s stock has experienced a dramatic drop, losing over half of its value since reaching an all-time high in 2021. On a positive note for those focused on income, Pfizer’s dividend has been consistently increasing.
In December, the company raised its dividend for the 16th consecutive year to $0.43 per share, resulting in an attractive yield of 6.7% at current prices.
While stocks with extremely high yields can raise concerns about potential dividend cuts, Pfizer seems to be secure. The pharmaceutical titan expects adjusted earnings this year to fall between $2.80 and $3.00 per share, which comfortably exceeds the recent dividend commitment of $1.72 per share.
Sales of Pfizer’s COVID-19 vaccine and treatment are significantly down from their peak levels, yet the worst appears to be behind the company. Total sales for Paxlovid and Comirnaty dropped by 11% to an aggregate of $11.1 billion for 2024.
Currently, Pfizer’s major revenue source is Eliquis, a blood thinner developed in partnership with Bristol Myers Squibb, which could face generic competition in the U.S. by 2028. However, Eliquis only constitutes around 10.3% of Pfizer’s overall revenue, so the company possesses several new treatments to cushion any forthcoming losses. For instance, Padcev, an innovative cancer treatment, generated annualized sales of $1.8 billion in the fourth quarter, with forecasts suggesting it could exceed $8 billion by 2030 due to its recent FDA approval for bladder cancer treatment.
Which is the Smarter Investment?
Assessing the upcoming challenges, Pfizer’s impending patent expiration impacts appear more manageable than those facing Merck. As it stands, Pfizer’s prospects for continuing its dividend growth through the next several years seem strong, in stark contrast to the uncertainty surrounding Merck’s future payout potential.
Even if both stocks were to present similar yields, Pfizer emerges as the preferable choice. With a significantly higher yield and promising outlook for sustained growth, Pfizer is undoubtedly the more attractive dividend stock to consider for investment at this point in time.
Source
www.fool.com