The biotech sector is one of my favourites in which to invest. Non-cyclical demand for medicines and the possibility for shareholders to benefit from exciting clinical breakthroughs are appealing factors. Accordingly, I think there are plenty of dividend shares to buy in this area of the stock market that have potential for good long-term returns.
Two pharma stocks I already own that I’m buying more of this month are FTSE 100 constituent GSK (LSE: GSK) and S&P 500 constituent Johnson & Johnson (NYSE: JNJ).
Let’s explore the outlook for each company in turn.
The GSK share price fell 10% over the past year. However, there are signs of a recovery after strong earnings results. The stock currently yields 6.05%.
Climbing 13% year on year to £29.3bn, the firm’s full-year sales exceeded expectations. I’m particularly encouraged by double-digit annual revenue growth across several divisions, including speciality medicines (+37%), oncology (+23%), and HIV (+20%).
The pharma giant signalled shareholders may benefit from improved margins. It predicts a 10-12% adjusted operating profit rise and a 12-15% earnings per share (EPS) uplift. These numbers add credibility to CEO Emma Walmsley’s claim that 2022 was a “landmark year” for the business.
In addition, passive income investors will note the company’s progressive dividend policy remains unchanged, guided by a 40-60% payout ratio. An expected dividend of 56.5p per share makes this one of the highest-yielding FTSE 100 stocks in the sector.
The firm faces risks from competition, particularly companies that have invested heavily in mRNA technologies, like Moderna and Pfizer. Both businesses are targeting an RSV vaccine this year. Recently, Moderna announced its candidate vaccine was 84% effective at preventing symptoms in older adults in a late-stage trial.
GSK has cited its potential new RSV vaccine as a growth area. The company could face a tough fight for market share. Nonetheless, this stock looks attractively valued compared to its rivals, in my view, with a price-to-earnings ratio of just 4.15.
Johnson & Johnson
The Johnson & Johnson share price fell 4.5% over the past 12 months. The dividend yield is 2.77%.
The firm is a true dividend aristocrat. It’s enjoyed a 59-year dividend growth streak and hasn’t missed a dividend payment in over a century. Although shareholder payouts aren’t guaranteed, this company’s dividend is about as safe as it gets.
It’s one of only two US companies with an AAA-credit rating, alongside Microsoft. This means it has a very low bankruptcy risk, even in a severe recession. The firm has a strong drugs pipeline and a diverse product mix. It manufactures vaccines, medical devices, and consumer healthcare products.
Robust product demand makes Johnson & Johnson an inflation-resistant stock in my view. However, the company also faces looming settlements for potentially billions of dollars in restitution payments.
Over 40,000 lawsuits have been filed alleging that the group’s talcum powder products caused cancer. A US court recently blocked the business from using a legal manoeuvre to divide the company and file for bankruptcy in the proceedings, although Johnson & Johnson plans to appeal the decision.
Ongoing legal difficulties could limit further share price growth. Despite the risks, a solid history of good returns, a resilient balance sheet, and reliable dividends make this stock a buy for me.