Love them or hate them, you are probably invested in large pharmaceutical companies. If you have a 401(k), a mutual fund, or own any large ETF, chances are that some of the major holdings are “Big Pharma.”
Merck, Pfizer, and GlaxoSmithKline are some of the biggest companies in the country, each with over $25 billion market caps.
For any serious investor, this past election was of the utmost importance…
Big Pharma investors held their collective breath when it looked like Hillary Clinton was going to be our next president. She had campaigned on taking on price gouging by pharmaceutical companies and sticking it to drug makers once and for all…
(This is despite taking more money from the health care industry then all of her Republican rivals combined, by the way.)
For investors, this was one of the most compelling conflicts of the election.
“Pharma and biotech probably have more at stake in this election than any industry,” Dan Clifton, head of policy research at Strategas Research Partners told Bloomberg at the time.
So it stood to reason that a Donald Trump presidency would be good news for pharmaceutical and biotech investors.
But then he got elected, and things changed…
Trump used his first major press conference to scold drug companies who he said were “getting away with murder.” He called the drug industry practices “disastrous” and threatened to involve the government in negotiating drug pricing.
He went on to say that “Pharma has a lot of lobbies, a lot of lobbyists, a lot of power. And there’s very little bidding on drugs. We’re the largest buyer of drugs in the world and yet we don’t bid properly. We’re going to start bidding. We’re going to save billions of dollars over a period of time.”
As a compassionate human being, I couldn’t agree more — drugs are incredibly expensive. But as an investor, I wouldn’t be too keen on a government crackdown on drug prices. I also think that even if President Trump goes after drug companies, it won’t make a big difference in the long run.
In the short term, however, Trump’s comments sent a quick shock through the Pharmaceutical market.
After the dust settled, Trump had almost singlehandedly dropped $24.6 billion in value from the nine biggest Big Pharma companies. The S&P 500 Pharmaceuticals, Biotechnology & Life Sciences Index fell almost 2% and the Nasdaq Biotechnology Index fell another 3%.
That is a pretty serious hit for a few lines in a speech.
However, I think the market reaction to Trump’s statement is an overreaction. As Trump said, Big Pharma has a lot of lobbyists and they are going to keep working the system regardless of what he says. And there is little he can do to remove the influence they have already paid for.
According to Open Secrets, the Pharmaceutical and Health Products industry spent $186,215,379 last year to buy favor with lawmakers. That’s a whopping $75 million more than the insurance industry — which was the next biggest spender.
All the tweets in the world aren’t going to make that influence disappear.
Here are a couple stocks that will easily withstand anything Trump throws at them while paying a handsome dividend.
AbbVie (NYSE: ABBV)
AbbVie is a global biopharmaceutical company with a focus on addressing some of the world’s greatest health problems. The company was spun off of Abbott Labs (NYSE: ABT) in 2013 in order to focus itself on pharmaceuticals while Abbott took over the medical products business.
It produces the biggest blockbuster drug in the world — Humira for rheumatoid arthritis — which is projected to pull in over $18 billion a year into 2020. It also has a stable of drugs that treat cancer, hepatitis, endometriosis, and autoimmune disease. In fact, seven of the drugs focusing on these illnesses could bring in over $25 billion a year.
In order words, it has plenty of drugs in the pipeline to keep growing.
The spinoff has worked wonderfully for AbbVie, whose stock has gone up 81% since. However, it pulled back a bit from a $70 high and is now sitting at an attractive $61.
It also qualifies as a dividend aristocrat from its time with Abbott — which has collectively raised its dividend for over 25 years straight. Since the spinoff, it has increased its dividend payouts by 60%.
Its most recent dividend hike was a 12% increase… it should continue to do so.
It currently yields a juicy 4.1% and offers a fee-free dividend reinvestment program, so you can buy the stock without any broker fees and let that dividend compound.
With some steady growth and ever-growing dividends, AbbVie should succeed regardless of any measures Trump would put in place.
The next one is a solid bounce-back candidate with some major upside…
Teva Pharmaceutical Industries Limited (NYSE: TEVA)
Teva is an Israeli company that specializes mainly in generic drugs — which would seem to be far safer if Trump starts waging price wars on expensive “designer” drugs.
The stock has taken a whoopin’ recently and is currently down 48% in the past year.
Some of that decline can be attributed to the large amount of debt it incurred while acquiring Actavis — a generic drug company.
But as they say — buy low, sell high. This is a prime opportunity to do it.
Teva has a couple big drugs coming down the pipe that should help its share price climb back up quickly in the next year.
One of which was just approved today. The FDA just approved Vantrela ER — which is a painkiller with built-in features that deter abuse. Given that opioid painkiller abuse is now officially an epidemic, a drug like this should be well received. According to the American Society of Addiction Medicine, in 2012 “259 million prescriptions were written for opioids, which is more than enough to give every American adult their own bottle of pills.”
That has led to millions of people becoming addicted to these drugs and made drug overdoses the leading cause of accidental death in the country. If Vantrela ER can deliver on its promises, this should be a win for humanity and for Teva’s bottom line.
It is also somewhat insulated from U.S. price wars since only 50% of its revenue comes from the U.S.
Teva is also the cheapest generic drug stock out there, and two of its competitors Mylan (NYSE: MYL) and Valeant (NYSE: VRX) have both already felt the wrath of congressional oversight for price gouging.
Oh, and they also sport a generous dividend of 4%.
But if you are gun-shy about Big Pharma stocks, there is one way to play the health care sector that is a sure thing…
When I experience events like Trump tanking the pharmaceutical sector, I like to look beyond the noise and focus on long term-trends. And when I think about health care-related stocks, there are a few facts that you simply cannot afford to ignore.
The entire world is getting old.
Every year, over 3.6 million baby boomers are retiring — 10,000 people every single day! By 2050, 81 million of them will reach retirement age. By 2060, 92 million Americans (20% of the population) will be 65 or older.
Of course, they will all need the drugs peddled by the big pharmaceutical companies to extend their lifetimes. But just as importantly, they will also need a place to live.
Retirement communities, senior apartments, assisted living, and all sorts of real estate associated with this demographic are sprouting all over the country. But supply of these properties is still extremely low. Demand will only rise as more Americans age.
You see, the current growth rate of senior housing units is just 21,950 units per year. To keep up with demand, 60,000 units per year are needed.
In other words, a 173% increase per year is required to even meet the demand, which is projected to peak in 2044.
That’s why I’m bullish on a little-known health-care sector that has nothing to do with drugs…
This investing vehicle holds companies that own income-producing real estate — basically they charge rent to businesses. These businesses could be shopping malls, restaurants, apartment buildings, self-storage facilities — or for our topic today, health care properties like hospitals, extended care facilities, or retirement homes.
These companies are also well known for their incredible dividend payouts — some of which are in double digits. That’s because they — by law — must pay at least 90% of pretax income as dividends.
That leads to some great returns for long-term investors with far bigger dividends than pharmaceuticals.
