Taking Stock: Drugs, Drugs, Drugs

Dear Mr. Berko: I have an $82,000 lump-sum payment (after taxes) coming to me from a buyout of a company I've worked for since 1982. I'd like to beat the market but keep my risks low while doing it. I've talked to several brokers, and they all recommend mutual funds and annuities that I know pay them huge commissions.

I was thinking about investing this money in the drug sector because (according to a financial article) drug stocks could outperform the market in the coming five years. So if you were a conservative investor, which drug stocks would you buy?

--PL, Cincinnati

Dear PL: I also think the drug sector can outperform the market ... and I also think that maybe it can't. However, the only certain metric that consistently outperforms the market is taxes. Most of these drug companies have lost patent protection on important drugs in their portfolios and have been railing against the invasion of generics over the last decade.

The industry's ''timeliness'' ranking is relatively flat, but I think this could finally be a good entry point for a medium-term, conservative investor. The following portfolio yields a solid, safe 4.2 percent, and dividends should grow modestly over the coming years. If you reinvest those dividends each quarter, and the value of the underlying seven drug issues appreciates just 3 percent annually, you may earn a sweet, minimum 7 percent average annual total return with little risk.

Bristol-Myers Squibb (BMY-$31.52) is a fine issue for investors seeking good dividend income and moderate principal growth. This $21 billion-revenue company with a superb drug pipeline should grow revenues about 7 percent and earnings about 8 percent annually for the next four to six years. BMY's $1.36 dividend yields 4.2 percent and could be raised nicely in the coming few years. So, by 2017, it's reasonable to believe BMY could be trading in the mid $40s.

GlaxoSmithKline (GSK-$44.22) is a world-class major pharmaceutical with $45 billion in world revenues. The $2.65 dividend will probably be raised in each of the coming four to six years, and it yields 5.9 percent. With expected growth in revenues and earnings, observers believe GSK can be a $60 stock by 2017.

Eli Lilly and Company (LLY-$38.81) is a $22.5 million pharmaceutical that may report declining revenues and earnings in the coming three to four years. While the current $3.90 earnings could drop to $3, the $1.96 dividend, which yields a solid 5.1 percent, should not be affected. LLY has no pipeline visibility, and with several lucrative patents nearing expiration, management has its hands full. Still, I'd own this issue because the dividend appears safe and because LLY may be an attractive takeover candidate between $48 and $53.

Merck & Co., Inc. (MRK-$37.98), which took over drug company Schering-Plough a of couple years ago, may also watch its revenues decline from $48 billion last year to $45 billion and earnings to the $3.60 level. Still, the $1.68 dividend, yielding 4.5 percent, is solidly entrenched. MRK's huge investment in China and the streamlining of its other foreign operations suggests uncommon near-term benefits. In the coming few years, MRK could trade in the high $40s or low $50s.

Novartis (NVS-$55.36) is a hugely classy $58 billion-revenue Swiss-based pharmaceutical paying a dividend that has been raised in each of the past 14 years. The current $2.04 payout yields 3.1 percent. Drug analysts expect annual revenue growth of 5 percent, annual earnings growth of 4 percent, and annual dividend growth of 6 percent with a 2017 price objective of $90.

Pfizer (PFE-$21.22), with $68 billion in revenues, is perhaps the largest drug company in the world. It believes that by 2017, its revenues can be $72 billion, that earning can grow to $2.10 from today's $1.30, and that its 88-cent dividend now yielding 4.2 percent will improve to $1.12 a share. Increased generic competition will weigh mildly on performance, but analysts feel that PFE can trade 10 points higher by 2017.

And finally, Sanofi (SNY-$36.78): the fifth-largest drug company in the world, with $48 billion in revenues. It is expected to continue improving revenues, earnings and dividends for the foreseeable future. The current $1.82 dividend yields 4.9 percent and could be increased to $2.30 in 2017 on higher revenues of $64 billion.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko @yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

Copyright 2012, Creators.com

Published: Mon, Mar 19, 2012